One of the first reasons you should be worried, as revealed by this article in the Wall Street Journal, is that a larger base of estates will actually end up paying more this year rather than less; “Under last year’s law, estates up to $3.5 million, or $7 million for married couples, were exempt from federal tax. This year that law has been replaced by a fiendishly complex levy raising taxes on the assets of those with little as $1.3 million. It will affect the heirs of at least 50,000 U.S. taxpayers who die this year, whereas the old law affected only about 15,000 estates a year.”

Another main cause of worry, explains the New York Times, is the possible reinstatement of the estate tax by congress, effective retroactively; “The general view is that Congress wants to, and should, re-enact the estate tax retroactive to the beginning of this year,” [says tax specialist Ian Shane] “In January, February or March that’s easy, but as the year goes on it becomes more difficult.”

Of course the biggest worry estate planners have is the effect this year-long lapse will have on existing plans. Couples who already have an existing estate plan are advised to get their documents reviewed—and possibly revised—to prevent “standard clauses” from having unanticipated effects. As Joanne Johnson, head of the American wealth advisory service of J. P. Morgan explained to the NY Times, “It’s common to find language like ‘I hereby fund this trust to the maximum amount I can shelter from federal estate tax.’ The rest can then pass tax-free to the spouse. Such wording is risky as long as the estate tax is off the books… because there is no maximum.” What ends up happening is that everything goes into the trust for the kids, leaving the spouse with nothing.

What is the lesson here? The lapse in the estate tax may not be the boon it first appears to be. Talk with your estate planning attorney to find out how the new laws may affect your family.

This assertion is not based on what is best for the government, but what is best for the tax-payer, and has to do with something called the “step-up in cost basis”:

“Step-up means that the property heirs receive is valued as of the date of death. So if Grandma leaves a grandchild stock selling for $75 a share that was bought in 1970 for $2 per share, the heir’s “cost basis” in the stock is $75. If the grandchild then sells the stock for $80, the taxable gain is $5 per share.”

If the estate tax disappears it is likely that the step-up in cost basis will as well. This means that the stock Grandma leaves you would be valued at the original $2 per share rather than the stepped up $75 per share, and when that same stock is sold for $80 per share the taxable gain would be $78 instead of $5!  This change will impact many more families than would be affected by the elimination of the estate tax.

The disappearance of the step-up in cost basis is just one of the concerns people have about the possible elimination of the estate tax and Congress’s failure to act. Other concerns mentioned in the Wall Street Journal article include:

• A retroactive estate tax
• A prohibition (or scaling back) of techniques used to trim estate taxes (such as family limited partnerships, grantor retained annuity trusts, and qualified personal residence trusts)

Watch for further developments, which we anticipate after Congress completes its wok on the Health Care Reform Bills, currently occupying its primary attention.

According to The Wall Street Journal President Obama was expected to take swift action when he took office to prevent the scheduled Estate Tax repeal, locking it in at a permanent rate instead. One of the reasons for this anticipated “swift action” by democrats was that it would be “politically harder to go ahead with their plan to resurrect the estate tax once it [had] disappeared.”

Although action has not been as swift as originally anticipated, it is not likely to disappear. Some ruling on the estate tax is still expected before the end of the year, although it may not be as permanent as people may hope for planning purposes. Here is what Forbes.com has to say about the immediate future of the estate tax:

“President Obama wants to see a permanent extension of the estate tax, but that’s unlikely to happen this year. Instead, look for Congress to give it a one-year extension, as it’s slated to expire for a year in 2010. For 2009, estates valued at less than $3.5 million are exempted from the tax, which has a maximum rate of 45%.”

If you’ve been putting off planning until a permanent decision on the estate tax is reached, it may be time to bite the bullet and take action now.