Estate tax planning right now is almost like running through a mine field blindfolded. Laws that apply for this year are nothing like last year and are nothing like next year… or are they?

As it stands right now, the estate tax exemption amount for 2010 is unlimited—in other words, there isn’t an estate tax. On the other hand, the stepped-up cost basis which heirs received in 2009 went out the door for 2010. This means the original cost basis of any property passed to heirs is carried over. What does that mean? Let’s say your dad bought a parcel of land for $25 an acre back in the good ol’ days and when he passed away in April, the land was worth $3,000 an acre. Your cost basis for resale or transfer of property since Dad died this year? $25 an acre.  The good news is that there is the possibility of a basis increase of $1.3 million up to current market value. But not all property is eligible for a basis increase and not all assets may receive one since that decision is left up to the executor. My advice is if you are planning to receive an inheritance this year, don’t upset the executor of the will. Confused yet? Just wait…it gets better.

We are almost to the end of 2010 and approaching a heated mid-term election. This leaves little or no time for new estate laws or amendments to pass after everyone stops tiptoeing around the subject. This is probably good news for the question of whether a retroactive law will be put in place for an estate tax exemption amount and tax rate. Our best educated guess is there most likely will not be one. However, this doesn’t help 2011, which is  in worse shape than 2010. As it stands now, the estate tax exemption amount and all tax rates “sunset”! This means the exemption amount will be a whopping 1 million dollars and the top tax rate will be 55%. Are you detecting a bit of sarcasm? Anything over $1 million in assets which you leave your heirs will be taxed? This is a massive change from the $3.5 million dollar exemption in 2009. Most young adults who purchase life insurance policies for their families will fall into this category. But hey, the stepped-up cost basis will be back…which is a good thing considering capital gains will be taxed at a higher rate

The best advice: don’t die yet if you like your heirs. Since you can’t seriously count on that, you really need to review your estate plan and will. For instance, some wills actually state something to the effect of, “to leave the amount exempt from estate tax to my children…” OUCH!!! You only think you’re dead now; just wait until your spouse catches up to you. The simple fact is that if there is a possibility that your estate could fall prey to these uncertainties and potential pitfalls, you need help. There are still many estate planning strategies you can implement to offset and/or avoid estate taxes. Furthermore, the current investment and economic environment has beyond doubt contributed to the benefits of some of these strategies.

Take the idea of a Grantor Retained Annuity Trust (GRAT), for example. This type of trust allows you to pass the future appreciation of your assets with minimal to no gift or estate taxes, still maintain an interest in the trust as well as receive income from the trust over a set number of years. The reason it is beneficial is due to the fact that many asset values are depressed in today’s economy and the federal discount rate, which is used as the discount value for the required payments to you, is very low.

You have often heard me say, you don’t know what you don’t know. This year has left Americans in a position of economic confusion and uncertainty—whether it’s regarding estate planning, investments, retirement, insurance, taxes, etc. More than ever, I encourage you to get a second opinion in regard to your Life Plan to identify any gaps or overlaps, or if for no other reason than to get reassurance that your plan is satisfactory.

This article is for informational purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding Kennedy Finanical Services is not engaged in rendering legal advice. Individuals should consult with their own legal concerning their own specific situation. Securities & Advisory Services offered through VSR Financial Services, Inc., a Registered Investment Adviser and Member FINRA/SIPC. Kennedy Financial Services is independent of VSR Financial Services, Inc. VSR does not provide tax or legal advice.