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In the area of estate tax law, the only thing that is certain right now is that things are going to change. The Economic Growth and Tax Relief Reconciliation Act, passed in 2001, came with a 鈥渟unset clause,鈥� giving Congress until Dec. 31, 2010 to extend the law or else it would disappear and the laws previous to its passing would go back into effect. Under current law, the estate tax disappears entirely in 2010, and then returns with a vengeance in 2011 with lower exemptions and heftier rates.

Several bills designed to clear up some of the confusion around estate tax laws, are being reviewed, and are set to make their way through Congress in the coming months.

Some certainty on the horizon
The 鈥淭axpayer Certainty and Relief Act of 2009鈥� aims to eliminate some of the uncertainty and fluctuation around estate taxes and exemptions. The bill makes the 2009 estate tax, gift tax and generation skipping tax laws all permanent. Some of the elements of this proposal include:

鈥� A permanent estate tax exemption of $3.5 million for an individual and $7 million for a married couple. An amended version approved by the Senate sets the exemption at $5 million. Under current legislation, in 2011 the exemption reverts to only $1 million for an individual.

鈥� A maximum estate tax rate of 45 percent. An amended version approved by the Senate sets the rate at 35 percent; currently, the maximum rate is 55 percent. There will be a 5-percent surcharge on very large estates.

鈥� A portability provision for married couples allows the unused exclusion amount of the first spouse to die to be added to the surviving spouse鈥檚 exclusion.

鈥� A permanent gift-tax exemption of $1 million and permanent generation-skipping transfer-tax exemption of $3.5 million. The exemption doubles for married couples.

鈥� Inflation indexing provides for an increase in the amount exempt from estate taxes as the cost of living goes up. This indexing would be in $10,000 increments, starting in 2011.

鈥� Reunification of the estate and gift tax, meaning that the $3.5 million exemption would apply for estate, gift and generation skipping tax purposes. The same rates would apply to all three taxes as well.

In general, the increase in the estate tax exemption and the decrease in the estate tax rate that this proposed legislation offers is good news to people with large estates. However, some other proposals are on the table that change the way other tools for passing wealth could be utilized.

Limitations on current techniques
Other proposals under review seek to limit the way other tools and techniques can be used to pass wealth with minimal taxation.

Crummey provisions: Proposals are aimed at limiting the use of irrevocable trusts with Crummey provisions to qualify gifts for the annual exclusion from gift tax.

Duration of generation skipping tax: Proposed changes would limit the duration of the exemption to one additional generation, essentially eliminating the perpetual deferral of estate or generation skipping taxes.

Valuation discounts: Proposed changes would eliminate marketability and minority discounts and passive assets, preventing the use of family entities to transfer passive investments at discounted values for estate and gift tax purposes.

Qualified personal residence trusts: Proposals seek to eliminate use of these trusts, which allow clients to transfer to their beneficiaries a portion of the appreciation in their principal residence, estate tax and gift tax free.

Grantor-retained annuity trusts: Proposed changes would limit the use of one of these trusts by imposing upon them a minimum of 10 years.

The bottom line
Changes in the economic landscape, tax law, or your personal or financial situation can make even the best estate plan outdated. A periodic reassessment can ensure that your plan adheres to current tax law and will continue to meet your objectives.

These new tax law provisions can greatly affect your estate plan, so be sure to reexamine your plan with your professional adviser.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or [email protected].