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Estate Tax Reform Fails and The Dirty Little Secret of The Law

The last minute attempts to extend the federal estate tax have failed. As a result, the impossible -no estate tax in 2010- now seems likely. According to the Wall Street Journal, Congress is considering a bill early in the new year, to apply the estate tax retroactively.

However, this current state of affairs leaves many Pennsylvania families without guidance on what to do with their estate planning, wills, and trusts, and with a profound sense of continued uncertainty. If you are concerned, that your will, trust, or other estate planning documents might no longer work as expected, then read on.

“At Unruh, Turner, Burke and Frees we are encouraging clients to do the most flexible will and trust planning but not to ignore this terrible situation created by Congress.” said David M. Frees, Chairman of the Trust, Estate, and Wealth Preservation Section of the firm.” Many people think that if the tax lapses as scheduled, that they can then gift the bulk of their assets without paying gift or estate tax. “That’s a mistake,” according to Frees and his partner Doug Kaune.

For starters, the estate tax may be applied retroactively. Secondly, there are still limits on what you can gift without paying a tax. Finally, there is a hidden and dirty little secret in the law that will take effect on January 1st.

According to Frees, “It may be, that Americans will lose the step up in basis that they have always gotten when they inherited property from an estate. For example, if Mom paid $5.00 per share but it was worth $20 per share at her death, your tax basis currently steps up to $20.00. If you sell the stock for $25 per share, you only pay capital gains tax on the $5 per share. Under the new system, you would pay capital gains tax on $20 per share.”

This means, that many more families and estates will pay capital gains taxes even if fewer pay estate taxes. “This is a backdoor tax on many American families with smaller estates who would otherwise never pay estate or capital gains taxes.”

If this sounds complex, it’s because it is. Don’t assume that there is nothing that you can do. Be proactive and update your estate planning now. While you mat have to adjust it later, you should have a plan that will work regardless of the tax law debacle.

“So, if you have a plan that is more than a few years old, if your estate (including life insurance) is over 1 million dollars, or you have a plan with federal estate tax planning trusts under your will you should consider reviewing your plan with counsel to build in more flexibility during these difficult times and until Congress eliminates some of these uncertainties.”

Unruh, Turner, Burke and Frees maintain law offices with lawyers practicing estate, trust, estate planning and probate law in Phoenixville, Malvern, and West Chester, Pennsylvania and serve all of Chester County, Montgomery County and Berks, Bucks, and Lancaster Counties.

Are you concerned that the failure of Congress to pass an extension of the federal estate tax law might mean that you have trusts, or wills that no longer work correctly?

David Frees, Doug Kaune and the lawyers of Unruh, Turner, Burke and Frees can be reached at 610-933-8069 or email Mr. Frees at dfrees@utbf.com. Mention this article to receive a discounted consultation or will review in light of these circumstances.

Please also leave your questions and comments below.

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