I have been out of touch for quite a while. I apologize. I am getting back on the bandwagon with the intention of posting consistently once per week.

You have my permission (and encouragement) to call me out if I fall down on the job again.

This week’s topic is dealing with the uncertainty in Estate Planning in the US.

There are both federal and state estate taxes. For the majority, Estate Taxes are not an issue. For the wealthy or those with Estates over the Estate Plan limits, good estate planning can save you some serious money (with 2009’s estate tax rate at 45% and 2011’s currently scheduled to go to 55%).

For 2010 there is currently no federal estate tax.
No one can believe that the government has allowed this to happen since it is a significant source of revenue to the government.

There is talk of passing an estate tax law that will retroactively go back to January 1, 2010. I personally wonder if that will hold up in court and do not believe it should be allowed to go back retroactively.

So currently, in 2010 you can pass away with a billion dollars and you will not owe the federal government estate tax on this money. (State Estate Tax is different and separate.)

The Limited Step up in Basis
The kicker is that in 2010 you must designate what assets will get the step up in basis and there is a limit to the amount of assets that will get the step up in basis.

Go here if you are asking “What is a step up in basis?”

You are currently (in 2010) only allowed a step up in basis on $1.3 million if the assets go to a non-spouse or $4.3 million of assets are allowed to get a step up in basis if a spouse is inheriting the assets.

This is a logistical nightmare because many people do not know the basis of their assets. Many older people have stock certificates in safety deposit boxes and have no record for when they bought them.

No one knows exactly how this limited step up in basis will be handled in the future but we are told you must choose and designate which assets get the step up in basis.

Currently, the Estate Tax exemption reverts back to $1 million in 2011 with a 55% tax rate which means LOTS more people will be paying federal Estate Tax. In 2011 you will once again get a an unlimited step up in basis.

In 2009 the Estate Tax exemption was $3.5 million with the top estate tax rate being 45%. (Yes, I am over simplifying many things here and no I am not an estate attorney.)

My point to all of this is to bring your attention to the craziness and uncertainty with the Federal Estate Planning Tax laws.

As a financial planner or Estate Attorney it is impossible to plan when you don’t know what the rules will be. Everyone is waiting to see.

I feel it was grossly negligent for the government not to take care of the Estate Tax issues before 2010.

I understand that the government needs money and this is a great source of funding from the ultra wealthy. Having a $1 million exemption is too low in my opinion and would impact the middle class. I hope that the $1 million exemption will get changed. The rumor is that they expect the limit to go back to $3.5 million.

The short answer is that most states have legislation in place so a legally married spouse cannot be completely disinherited (intentionally or unintentionally) but you must take timely action to claim this right.

The writing of this post/article was motivated due to a friend of mine who said their 80 year old grandmother was disinherited when her husband died. Even though it was a second marriage for both of them, they had lived together and had been married for more than 10 years. Everything in the will went to her husband’s family and my friend’s grandmother was kicked out of her home with nothing to her name.

My friend’s family did not know her rights and her options at the time. I wish they did and so hopefully this article will help some others become aware of the choices should a similar situation arise.

Estate Planning laws vary from state to state and are complex. My intention here is to keep things simple and give the highlights so you know enough to ask questions and talk to an Estate Planning attorney for the specific options and details.

Spousal Right of Election

Most states have legislation called a “spousal right of election” which allows a spouse to ignore the will and elect to receive the “elective share” of the decedent spouse’s “augmented estate.” The augmented estate includes both the probate and non-probate estate. In layman’s terms the augmented estate includes everything the person owns. There are some exceptions to what would be included in the augmented estate.

This legislation has changed periodically to prevent people from utilizing loop holes in the law to intentionally disinherit their spouse so they did not get anything after they passed away.

For New Jersey and Pennsylvania the elective share is 1/3 of the net augmented estate.

The Options and Criteria

The surviving spouse has a choice of 1) accepting the provisions of the deceased spouse’s will or 2) select to receive their elective share and go against the will. Action must be taken to claim the elective share. The election must be made in writing within 6 months of the issuance of Letters Testamentary or Letters of Administration and no more than 2 years from the spouse’s date of death.

Exceptions to the Spousal Right of Election

A spouse’s right of election can be disallowed with a pre-existing written agreement between the spouses which waives this right. Examples of some of these are a pre-nuptial, post nuptial or separation agreement.

In some states if a person dies without a will (intestate), the elective share can depend on whether or not there are surviving children of the deceased. If there are no children, the spouse is entitled to 50% as an elective share. If there are children, the spouse’s share is 30%.

With second marriages so common many want to make sure their estate goes to their own children and may unintentionally disinherit their current spouse. There are methods (Credit Shelter or Q-TIP Trusts) to protect the estate, provide for a surviving spouse yet limit access and guarantee that the remainder of the estate goes to the decedent’s children.

The rules around protecting the rights of a disinherited spouse are complex and vary from state to state. The objective of this article is to highlight for you that this right exists. You should consult with an experienced Estate Planning attorney to find out which options best suit your particular situation.