Revisit your estate plan strategy

Q. Will the 2010 Estate and Generation Skipping Transfer Tax Repeal mean that I will have to redo my will?

Until Jan. 1, 2010, almost everyone expected Congress to act to prevent repeal of the estate tax. Many expected a simple patch to extend 2009 law into 2010.

Traditional estate planning documents refer to tax code concepts that no longer exist and apply tax strategies that no longer function as intended. Many modern estate plans used formula clauses to divide an estate at the death of the first to die of a married couple into two portions: one equal to the then-current exemption and the other set aside for the surviving spouse. These formula clauses are now, largely, obsolete.

For example, a popular formula clause provides for the maximum amount that can be transferred estate-tax-free into a family trust. The rest of the assets go into a marital trust for the surviving spouse's benefit. If there is no estate tax, everything may go to the family trust. There will be nothing left to fund the marital trust.

Formal review recommended

The law today, and perhaps tomorrow, is unlike prior law. Estate planning documents should be reviewed by an estate planning advisor, including:

Even if you expect to outlive 2010, the future of your estate is uncertain. Prior to 2010, the law allowed for an adjustment in basis-a step-up-to the fair market value (FMV) of inherited capital assets. Basis is deducted from sales proceeds to calculate the tax gain or loss on the sale of a capital asset like common stock.

For 2010 only, the step-up has been replaced with a modified carryover basis (MCB), under which the heir's basis will be the same as the deceased's basis, unless the capital asset has depreciated in value. In that case, the heir's basis will be reduced to the FMV as of the deceased's death.

In addition to technical adjustments available in limited cases, there are two modifications to this rule. First, each estate is entitled to a basis increase of up to $1.3 million. Second, capital assets passing to a surviving spouse may be entitled to an additional $3-million basis increase.

Estates able to utilize both modifications fully will realize a maximum $4.3 million increase in basis (1.3 + 3). A married couple could realize a combined maximum $5.6 million increase in basis (1.3 + 3 + 1.3).

The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the material is accurate or complete. Taxpayers should, and are advised to, seek advice based on their particulate circumstances from an independent tax advisor.

John J. Grande, CFP^® ,Traudy F. Grande, CFP^® , and John S. Grande, CFP^® are co-editors of Money Matters. John J. Grande, CFP^® , and Traudy F. Grande, CFP^® , are owners and principals of Grande Financial Services Inc. and registered principals of Raymond James Financial Services Inc., member FINRA/SIPC.

Their son, John S. Grande, CFP^® , has been in business with them for more than a decade. He has a degree in finance from Lehigh University, Bethlehem, PA.

The Grandes lecture at the Johns Hopkins University School of Medicine, and they advise ophthalmologists across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at 800/722-1258 or grande@raymondjames.com
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