THE UNIFIED CREDIT AND THE CHAOS CONGRESS CREATED WITH THE 2001 TAX ACT

It is mid-July, 2007...more than 6 years after the Tax Relief Act of 2001. The Tax Relief Act of 2001 gradually increased the Unified credit from $1,000,000 in 2001 to $3,500,000 in 2009 with a unlimited credit in 2010 and then a sunset provision in 2011 back to $1,000,000. http://www.nytrustattorney.com/estate-tax-exemptions.html

As you can imagine this has created a nightmare for estate planners and clients alike. I never understood the logic or compromise which created this law - what brilliant mind came up with a law that creates a windfall to residents who die in 2010 but penalizes those who happen to live to 2011? That doesn't make any sense - at least not to me.

The theory has always been that Congress will enact a new law before 2011 which establishes a set Unified Credit not a graduated one which phases out. However no compromise has been reached in the last 6 years and 2008 is an election year. I am concerned that in 2009 another "patchwork" bill will be enacted which continues this insanity for even longer. This is patently unfair to clients.

For example, let's discuss a typical client - a married couple who have a $3,000,000 combined assets. How do I advise them?

If I knew that they would die before 2009, I would recommend a credit shelter trust to eliminate their taxes because before 2009, with the proper use of trusts, a married couple can transfer $4,000,000 federal estate tax free.

If they die in 2009 or if they die in 2010, they don't need a credit shelter trust because in 2009, even without trusts, any individual can transfer $3,500,000 without federal estate taxes and in 2010, any individual can transfer an unlimited amount without federal estate taxes.

But if they are unfortunate enough to die in 2011, they need a credit shelter trust AND they will owe taxes when the second spouse dies because the unified credit sunsets back to $1,000,000. In 2011 and beyond a married couple with the proper use of trusts, can only transfer $2,000,000 estate tax free - which means for the above clients, they would owe federal estate taxes on $1,000,000 of their assets ($3,000,000 less a unified credit for both of them of $2,000,000).

In this situation I may advise the clients to execute disclaimer wills which gives the surviving spouse the right to determine the funding of the credit shelter trust, but this is more complicated both in the drafting of the will and also in the administration of the estate than it should be.

And let's be honest here - the only people that benefit from it being more complicated are the attorneys. There is more work to draft a disclaimer will than a simple will; and when the individual dies, there is much more paperwork to be prepared and filed with a disclaimer will than a simple will.

Does this seem fair to any one? Again not to me -- even as an attorney. So it is my hope that soon Congress will realize the mess they have created and correct it.