As a result of the 2001 tax legislation, the Federal Estate Tax has purportedly been repealed for 2010. While Congress is still debating the issue, as it stands now if a person were to die in 2010 there might be no federal estate tax on their estate. Additionally, step up in basis of assets to the date of death value is virtually eliminated. There is an exception to the step up in basis in that a spouse can elect to step up the basis in $3,000,000 worth of assets and other individuals can elect to have $1,300,000 of assets stepped up in basis. All other assets will be inherited with a carryover basis from the time the decedent acquired the property.
As a result of this new carryover basis rule, there could be an issue with capturing the basis increase in $3,000,000 of assets passing to spouse under a Will. In order to qualify for the step up in basis on the $3,000,000, the property must be held in what is known as a qualified terminable interest property trust. As most Wills are currently drafted, a formula is used to maximize the federal estate tax allowance that is in existence at the time of a persons death. While no one anticipated that Congress would actually allow a total repeal of the federal estate tax law, we are currently faced with that issue. There is talk that if Congress reinstates the federal estate tax they will make it retroactive back to January 1, 2010. However, some may challenge this as unconstitutional and we do not know if they would be successful.
Therefore, we want to inform everyone that under the current law, if a formula is used in your Will to maximize the funding of the Credit Shelter Trust, all of your assets will go to that under your Will. What this means is that your surviving spouse may lose the right to get a step up in basis on $3,000,000 worth of assets as no assets from your estate will go to the QTIP Marital Trust. Some argue that your family could go to court and argue that your intent was not to have all assets pass to the Credit Shelter Trust and that the court may “revise” the Will to accomplish your intent to fully maximize all benefits affordable to your spouse. Unfortunately, we cannot advise whether this argument would be successful.
Of course, if the federal estate tax is reinstated and made retroactive, there is no issue. However, if it is not retroactive, and if you pass away during a “total repeal” period (2010), your spouse and family may lose out on the benefits of a step up in tax basis.
Therefore, it is advisable that you contact an attorney to execute a Codicil to your Will to assure assets that pass to your spouse will be allowed to fully utilize the step up in basis rule.