Did you ever have a teacher that answered all of your questions with a question of her own? That’s the way I felt sitting in the nation’s largest annual professional estate planning conference held in Orlando last week. Attending this conference is like taking a full semester’s course load of post-graduate level tax law in just five days.  But I will tell you this – I’ve been here for the better part of twenty years and haven’t seen anything like what I saw this year.

 At issue is whether there is going to be a federal estate tax this year (2010) and what will happen if any of our clients are unlucky enough to die this year. I say this because the repeal of the estate tax law for one year causes untold problems (and questions) in many estate plans. Most of you reading this could be affected one way or another.

You may recall that under the current law, absent any action by Congress and the President, there is no federal estate tax for decedents who die this year. Before you pop the champagne on the demise of the federal estate tax, allow me to elaborate on the multitude of problems this repeal may cause – in many of your estate plans.

 Married couples who have wills and trusts with estate tax planning built into them usually have something known as a “formula clause” in their documents that divides the estate at death into a credit shelter trust and a marital trust. This is also sometimes referred to as an “A/B Trust.” The purpose behind these formula clauses is to effectively use, to the extent possible, the first decedent spouse’s federal estate tax exemption.

 Here’s one problem- if you are counting on a certain amount of money and assets to be funded into each “portion” of your estate, the repeal of the estate tax throws this all into question. In other words, the formula clause found in your plan could inadvertently cause more (or less) assets to be distributed to your children, grandchildren or spouse than what you had originally intended – should you or your spouse happen to die this year.

 Of particular concern are folks who have a current distribution to children even if a spouse survives. This is more common in second marriage situations, or in larger estates.

 The same holds true when you have named grandchildren or more remote descendants in your estate plan – whether or not those bequests are to occur before or after the death of the surviving spouse.

 When you have amounts that are left to grandchildren, those bequests are usually limited by a formula related to the generation skipping tax exemption. The generation skipping tax is a “penalty tax” for leaving too much to grandchildren and more remote descendants.

 The generation skipping tax exemption formula is also often used when you leave amounts to your children in a continuing trust. The reason you may leave amounts to your children in continuing trusts is to protect it from divorce, creditors…and from estate tax at your child’s death.

 When you leave amounts to your children this way, the child’s share is often subdivided into an exempt share and a nonexempt share. These shares are divided via – you got it – a formula that is tied to the generation skipping tax. Since there is no generation skipping tax this year (as far as we know) then any amounts that are of be distributed under a formula tied to that tax exemption creates more questions. How much of your child’s share is exempt from tax in his estate when he dies? We don’t know!

 This does not mean that your planning is bad. What it means is that you might want to review your plan to make sure that the formulas don’t result in unintended distributions.

 Charitable trust planning could be thrown into disarray. Many charitable trusts call for the distribution of a portion of the proceeds to a charity and another portion to surviving family members. Sometimes the income is paid to charity for a term of years with the balance distributed to the family upon the termination of the trust, and sometimes vice versa. In both instances, the amounts that are distributed are tied to the estate tax formulas. When you have a decedent who dies this year, there could be several issues as to who is entitled to what.

 Gift tax laws are also in a state of flux. Consider an irrevocable life insurance trust where the parents contribute amounts to the trust that are intended to be used to pay life insurance premiums. Each beneficiary is provided a Crummey power, which is a power to withdraw their portion of the contribution to the trust in order for the contribution to be considered gift tax free to the extent that each portion is less than $13,000. Where grandchildren are also beneficiaries or potential beneficiaries of the life insurance trust, an allocation of generation skipping tax exemption generally occurs automatically. Except now – due to the 2010 rules. So what happens? These are issues you might want to address with your estate planning counsel.

 Even though the current law abolishes the federal estate tax for this year, it does not abolish state death taxes. For those of you who reside in another state, or who own property in states that have a state death tax, there might be additional problems lurking in your plan.

 If all of this isn’t confusing enough, the step-up in tax cost basis rules are in a state of flux for 2010. You may know that under the prior law beneficiaries generally inherit assets at the current fair market value rather than at the decedent’s tax cost basis. What this means in layman’s terms is that when I inherit appreciated property or stock from my father at his death, and I sell that asset at the date of death value, I do not recognize capital gain.

 Well, this step up in tax cost basis goes away for 2010. There is a limited step up in tax cost basis for up to $1.3 million of assets. In order to comply with this law, beneficiaries will have to know the historical tax cost basis of the assets held by a decedent. Married couples get up to a $3 million step up. Both of these step-up laws are complex and the reporting requirements are not yet understood. The IRS has not issued forms to file to comply with this 2010 law.

 And all of the above is just a very small synopsis of the 2010 law’s effect. There are band aids that you can put into your documents to take care of many of these problems. If any of this rings a bell, it makes sense to consider meeting with your estate planning attorney to ensure your documents won’t lead to unintended surprises.

 So in 2010 we have a lot of questions. And it’s likely to remain that way until we get a new tax law passed.

 ©2010 Craig R. Hersch