Potential Estate Planning Blunder For 2010

I was assisting a client with reviewing their estate planning today, and I came across a potentially devastating clause in each of their wills.  This clause is, for the most part, boiler-plate verbiage in all wills so I thought I’d bring it to everyone’s attention.  It may or may not apply to you, but I wanted to put the word out regardless.   What’s at issue:  with the new estate planning laws that went into effect this year, the surviving spouse could end up with none of the deceased spouse’s half of the estate.

The clause in the spotlight is a clause that is normally very effective in transferring wealth to surviving spouses and children/charities.  But, as I mentioned above, with the new estate tax laws that went into effect on January 1, 2010 the clause can actually do more harm than good.

Basically, what the clause says is something like this: “When I die, I direct that my surviving spouse is to receive my entire half of the estate, up to the annual exclusion amount.  Everything over and above the exclusion amount should go to my children” (or other siblings, charities, etc.).  For 2008 and 2009, the annual exclusion amount was $3.5 million.  Therefore, in previous years this clause would take the first $3.5 million from the deceased spouse’s half of the estate, give it to the surviving spouse in trust, and everything else goes to the children/relatives/charities, etc.  By doing this, couples can theoretically shelter $7 million of their estate ($3.5MM for each spouse) from estate taxes.

HOWEVER, in 2010 the ‘death tax’ (the estate taxes paid upon someone’s death) is repealed meaning there is no estate tax due on someone’s death regardless of how much money they have.  Therefore, if Bill Gates or Warren Buffett died tomorrow, they would not have to pay a single dime in estate tax.

Here is where the problem could arise:  since there is no estate tax due on a person’s death, there’s no need to have an annual exclusion amount peeled off the top to shelter it from estate taxes.  In other words, the annual exclusion just went from $3.5 million to $0 for 2010.  With the way the clause is written, the spouse will get $0 and everything else goes to the children.  Not good!!

Now, it is highly unlikely that the government will allow this death tax repeal to exist for the rest of the year.  From what I’ve read and heard, they will re-instate the $3.5 million exemption and 45% top tax rate later this year and make it retroactive to January 1, 2010.  But that still should not preclude you from at least reviewing your estate plan to make sure it is set up to do what you want it to do.

If you have a will and have not reviewed it in the past four or five years, please do yourself a favor and read through it again.  If you are not sure what everything means please do not hesitate in contacting me.  I will be more than happy to read over it and explain what it is set up to do and make recommendations if I see any shortfalls in your estate plans.

If you don’t have a will…..you need to get one as soon as possible.  I’ll be happy to discuss with you how to go about getting this done.  I’ve heard of a lot of people who swear by online vendors (e.g. Legal Zoom), but I should stress that not everyone’s situation calls for online forms.  More times than not, meeting with an attorney is well worth the added cost.

I’ll be happy to answer anyone’s questions……I simply wanted to make everyone aware of the potential loophole I’m seeing in other people’s estate documents.