Expiration Of Estate Tax May Hurt Your Spouse

Having no estate tax can result in an unintended consequences for spouses. Here’s what My Elder can do for you.


The estate tax expired on January 1, 2010. It remains to be seen whether Congress will reinstate it before it returns in 2011, but the fact that there is currently no estate tax can have unintended consequences for spouses. Standard language found in many estate plans could leave spouses with nothing. It is important to check with an elder law or estate planning attorney to make sure your estate plan does what you want it to do. My Elder can recommend the best attorney for you. Call at 212-945-7550.

In previous years, estates could pass a certain amount of assets tax free (up to $3.5 million in 2009). In addition, spouses can receive an unlimited amount tax free. To take advantage of these rules, estate plans often contain a “bypass trust” (or “credit shelter trust”) and a will with language in it that is designed to allow estates to pass without any estate tax. For example, the will may state: “I leave to my trustees the maximum amount that can pass free of estate tax and leave the residual to my spouse.” Because there is currently no estate tax, individuals who die in 2010 with this language in their estate plan would wind up leaving nothing to their spouses.

This madness started in 2001, when Congress passed a law that gradually shrank the estate tax by reducing the rate and increasing the exemption, which is the amount a person can leave free of estate tax.

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In 2009, the exemption was $3.5 million per person and the top rate was 45 percent.
The law called for the estate tax to disappear in 2010 but reappear in 2011 in vampire fashion – with a $1 million exemption and a maximum rate of 55 percent.

Rather than allow such an inequitable tax, most people assumed Congress would extend the 2009 estate tax into 2010 and tackle a longer-term solution this year. But lawmakers did nothing before year-end, allowing it to temporarily expire. This is wreaking havoc on estate plans written under the assumption there would always be an estate tax.

For example, many wealthier people set up a bypass trust that essentially said, “I want the amount that will not create any federal estate tax to go to my kids. I want everything else to go to my spouse.”
This allowed each spouse to maximize his or her exemption because an unlimited amount can pass from one spouse to the other without estate tax, but when the surviving spouse dies, anything exceeding the exemption is taxed. A spouse who left everything to the other spouse would squander the exemption.

My Elder provides elder advocacy services to families. Talk to us about long-term planning, finding the right home for your loved ones, preventing crisis and abuse, and ensuring they receive the best care possible.