On June 12, 2002, the United States Senate, in its infinite wisdom, rejected a Republican proposal backed by the Bush administration to permanently eliminate the federal estate tax. As the tax law currently stands, the federal estate tax is being gradually reduced (through a combination of lower marginal estate tax rates and increasing estate tax exemptions) until 2010, when the tax is eliminated for decedents who die during that year. So far, so good. However, the law, as currently written, re-enacts the estate tax, effective for decedents who die in 2011 or later.
What this means is that the estate of a person dying in 2009 will pay federal estate tax on all assets in excess of $3.5 million, at a maximum marginal rate of 45%. The same estate would pay no tax if the decedent died in 2010. Finally, if the person lived until 2011, the same estate would pay estate tax on all assets over $1 million, at a marginal 55% estate tax rate.
Many estate planners have designed plans that provide that a portion of the client’s estate equal in value to the “the maximum amount exempt from estate tax” (or similar wording) is left to the clien’s children at death, with the balance of the estate left to the surviving spouse free of estate tax. In 2002, (when the estate tax exemption is $1 million) this may make sense for a client with an estate worth $3 million. However, if that same client died in 2009 (when the estate tax exemption is $3.5 million), the client’s entire $3 million estate would pass to his or her children, and the surviving spouse would be effectively disinherited.
To avoid this potential unintended result, we have suggested that clients consider modifying this type of estate plan language to provide for a cap on the amount of property that is left to children (or other beneficiaries), so that surviving spouses are not inadvertently and unintentionally disinherited at the client’s death. Clients need to consider both whom they want to inherit their estates, and how much they wish to leave to each potential beneficiary.