You should not wait to find out what Congress is going to do.

By Ellen L. Baker

You should not wait to find out what Congress is going to do.

Several years ago Congress passed legislation that gradually increased the estate tax exemption and decreased the maximum estate tax rate.  In 2009 an estate worth less than $3.5 million incurred no federal estate tax and the maximum estate tax rate for estates that exceeded that amount was 45%.

That same legislation effectively eliminated federal estate tax for 2010.  Sounds good, right?  Maybe not.  Certain members of Congress have vowed to enact estate tax legislation this year and make it retroactive to January 1, 2010.  Can Congress do that?  It will be up to the courts to decide.  There will, undoubtedly, be lawsuits challenging the constitutionality of such legislation.  In the meantime, we do not know what the law will be.

To make matters worse, the so-called elimination of the estate tax came with a price.  Congress eliminated the "step-up" in cost basis, with some exemptions, for assets inherited by beneficiaries.  If a non-married individual died in 2009 with an estate worth $3 million as of the date of his/her death, the estate paid no federal estate tax.  The beneficiaries would receive the assets with an income tax basis of $3 million.  If the beneficiaries sold the assets for $3 million, they would incur no capital gain tax even if the decedent's original cost basis was only $1 million.  In 2010 the beneficiaries would incur a capital gains tax on all but $1.3 million of assets.

All of this is made more complicated by the fact that the current estate tax law will expire at the end of 2010 unless Congress acts.  As a result, the federal estate tax exemption will be reduced to $1 million and the top tax rate will increase to 55%.

When and if Congress will act to eliminate this confusion is anybody's guess.  All we know is that you should not ignore your estate plan.  You should not wait to find out what Congress is going to do.  If you have a Will that includes a "credit shelter trust" provision, you need to make sure it will still work to accomplish your goals.  There are ways to design a flexible plan that can provide for the uncertainty.  Do not forget that New York State and other states still have an estate tax.  Most importantly, you should not forget that there are many non-tax reasons to plan your estate.

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