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The Repeal is Here – You May Need to Update Your Estate Plan

The recent (and likely temporary) repeal of the Federal Estate Tax creates at least one critical problem you may not be aware of.

Married people who don’t update their estate plan could unintentionally disinherit a surviving spouse OR create an unwanted Massachusetts Estate Tax on the first death.  Here’s why:

1.    It’s become common for married couples to use estate tax funding formulas in their estate plans to place the maximum amount of assets not subject to the estate tax into a Trust, often to benefit children. The remaining assets go to the surviving spouse.

But this year, there’s no limit on assets that a client can pass to heirs without triggering the estate tax. And so, all of a client’s assets might automatically move into a Trust and a surviving spouse could be out of luck.

2.    Even if the spouse is the beneficiary of the trust, putting the maximum amount into the trust could subject ALL assets over $1 million to the Massachusetts estate tax on the first death. That can create hundred of thousands of dollars in completely avoidable tax.

Avoid Un-Intentionally Disinheriting a Spouse or Creating an Unnecessary Tax

Massachusetts allows surviving spouses to claim part of an estate even if disinherited, but it can be costly in court time and legal fees.

To avoid this dilemma, clients should update their estate plans to remove these formulas for 2010. Instead, you can plan to accommodate the Massachusetts Estate Tax and make sure no more funds than you want go to your children or other beneficiaries at the first death.

How Did This Repeal Happen?

Most experts believed that Congress would carry the 2009 estate tax exemption of $3.5 million through 2010 and address the estate tax this year. Instead, the House failed to act on a one-year extension and sent the Senate a bill to make the 2009 law permanent.

Estate Tax Congress

However, the Senate was so tied up debating health care reform and disagreeing over what to do with estate taxes that it did not act on the estate tax issue at all. Thus, the repeal took effect. Congress’ failure to adopt any estate tax legislation for 2010, as well as the possibility that no changes will be enacted at all this year, dramatically affects the estate planning considerations for many families.

What will happen? Here are some possibilities:

1) Congress will again do nothing in 2010, in which case there is a nominal step-up in basis and no estate tax for those who die in 2010. In 2011, the estate tax exemption automatically reverts to $1 million.

2) Congress will enact legislation to carry the 2009 exemption over to 2010 and make the legislation retroactive to Jan. 1, 2010. So if you or your spouses dies before the enactment, your estate could still be taxed.

Bottom Line: Act Now

Waiting to see what happens next is a bad idea. The earlier you apply flexible estate planning the better. It is critical to check now to see if updates are needed.

Our Process

At Dennis Sullivan and Associates we help people save taxes and protect their assets through a process that combines education and counseling. The process begins with an educational Trust, Estate and Asset Protection Workshops, held twice a month in Wellesley (for upcoming dates and to register, please call (800) 964-4295 or visit us at  The workshops are an excellent way to review existing planning, if any, and learn about the options available with estate and asset protection planning.  We welcome all members of the community to attend. For those that cannot attend, please contact our office directly or review our resources.