Everyone needs an estate plan, but not everyone has one — or has an adequate one. Often the plan fails to get a periodic review. Beyond collecting dust and leaving questions unanswered, tax law changes can render a plan obsolete or even harmful to heirs. 

To help, Iowa State University’s College of Agricultural Law and Taxation has updated its technical article on the estate, gift and GSTT rules for 2010 to 2012. It incorporates all of the recent guidance from the Internal Revenue Service, some of which raises new questions.

In December 2010, Congress passed and the president signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” It contains the most significant changes to transfer taxes (estate, gift and generation-skipping tax) in decades, notes Roger McEowen, Iowa State law professor and CALT director.

“The changes are so significant that standard estate-planning techniques may no longer be necessary,” he says. However, the changes are only for 2011 and 2012, with no clarity as to what might occur in 2013. So, uncertainty surrounding estate tax, which was present for much of 2010, is only addressed through 2012.

In 2009, the federal estate tax exemption was $3.5 million per decedent, with excess amounts taxed at 45 percent. The estate tax was repealed for deaths in 2010 and was scheduled to return for deaths in 2011, but with only a $1 million exemption and a 55 percent rate. The income tax basis rule, which had allowed property included in a decedent’s estate to receive an income tax basis in the heirs’ hands equal to the property’s fair market value at death for deaths through 2009, was also changed for deaths in 2010. For deaths in 2010, the so-called “stepped-up” basis rule was changed to a modified “carryover basis” rule, McEowen notes.

“The estate planning ‘ballgame’ has certainly changed for 2011 and 2012,” he adds. “There will be less emphasis on estate tax and charitable planning and more emphasis on retirement, succession, financial and income tax planning.”

The new rules provide a two-year window of opportunity to accomplish asset-protection planning on a large-scale basis. There are issues for individuals of moderate wealth as well. For example, if death occurs and the surviving spouse remarries, a limit on portability of the exclusion may apply, McEowen points out. Also, in some states, state estate/inheritance tax may remain a concern.

Historically, for spouses, the estate-planning strategy has been to divide spousal assets equally. “While that may no longer be necessary due to portability of the exclusion, the fact that portability only applies if both spouses die in 2011 or 2012, that portability may be limited,” McEowen says.

Add it all up and it’s worth considering whether existing estate plans should be changed. For more, go to http://tinyurl.com/6s78cpz.