This memorandum addresses a window of estate planning uncertainty created by Congress’ inaction that affects some, but not all, of my clients.

In 2001 Congress passed the current federal estate tax code which provided for an escalating exemption amount until 2011, at which time the exemption will drop down to the pre-2001 amount of $1 million. In 2009 the exemption amount was $3.5 million, for 2010 there is no federal estate tax, but in 2011, as mentioned above the exemption drops back down to $1 million.

Estate planners expected Congress to address the above by enacting an amendment that would extend the $3.5 million exemption for one or more years. We have been expecting such legislation for two years now. We certainly expected it to be addressed by December 31, 2010. However, it was not and the word on the street now is that it will not occur until late summer or later.

A key issue relates to wills or living trusts that define the amount to be applied to the “credit shelter trust” or “bypass trust” as the “exemption” amount in existence in the year of death. Currently, the concept of an “exemption” is non-existent during 2010. For my clients this issue applies primarily to situations where there is a second marriage with children from a previous marriage. In a few instances it may apply to first marriage situations. It does not apply to the “disclaimer bypass trust” approach which I have typically used for most marriage situations with no children or children from that marriage only. Also, there may be a reason to review this issue if one spouse defines a gift to his or her children from a previous marriage by reference to the exemption amount.

The current state of affairs also strikes the generation skipping transfer tax for 2010, but not the gift tax and the $1 million exemption related thereto. Additionally, it strikes the advantage of the stepped up basis rules for estates in excess of $4.3 million when left to a spouse and $1.3 million when left to non-spouse distributees.

If Congress does amend the code, it will most likely make it retroactive to January 1, 2010 or provide for an election to utilize the new legislation. The risk is the scenario of a death between January 1, 2010 and the enactment of the legislation.

I do not want to unnecessarily alarm clients falling within the categories of second marriages or where I have not used the disclaimer trust, but I felt compelled to alert such clients. As I stated above, this issue may disappear later this year. I have a practical concern about clients incurring legal fees to address this supposed temporary situation only to have the rules reset within a few months back to the original status.

If you would like me to review your situation please contact me. The matter can be addressed with a codicil (amendment to will) in most cases.

For clients not affected by the above issues, this is a reminder that you should have your estate planning documents reviewed every 3-5 years or upon the occurrence of a material change in circumstances. Also, as noted in previous correspondence, health care powers of attorney should be updated if yours was executed in 2003 or earlier (due to changes in federal legislation related to medical privacy restrictions).

Professionally, this is a frustrating experience. Estate planners have been waiting for Congress to address this point so that we can advise clients within the context of clearly drafted rules. Hopefully the situation will resolve itself shortly.