Thanks to Congress’s failure to act to "fix" the estate tax by the end of 2009, your estate plan may have a serious problem. If your estate plan divides your assets by use of a formula that refers to the estate tax, your plan could be in trouble.

Many people have this type of plan. It goes by various names. Some call it an A-B Trust, some call it credit shelter trust planning, some refer to it as by-pass trust planning. Whatever you call it, the salient feature is a word formula that directs part of the decedent’s assets to a trust and part to the surviving spouse (or to a trust usually for his or her benefit). These formulae were put into your plan so that your plan could adapt to changes in the federal estate tax, like the increasing exemption amount, and to take account of gifts you may make in your lifetime.

The formula divides the assets by reference to the federal estate tax law. Since we don’t have a federal estate tax right now, these formulae don’t work – they are either meaningless gibberish or they produce a bad result. (Thank you Congress.)

On December 31, I sent out letters to all my clients who had such formula provisions in their wills or revocable trusts. Many of them have been in to sign codicils or amendments already. If your plan has a formula, you really should get it fixed up for 2010.

One example of a formula would direct the distribution of the maximum portion of your estate amount that can pass free of estate tax to the credit shelter (or by-pass) trust. Since there currently is no estate tax, the maximum amount that can pass free of estate tax is 100% of your estate. Thus, if you died now, all of your assets would go to that trust; and your surviving spouse would not receive anything (except that he or she may have some interest in that trust). This is probably not what was intended when you signed the document.

Another example of a formula is one which provides that an amount passes to the spouse which is the whole estate minus an amount equal to the amount the federal exemption equivalent which is directed to the credit shelter (or by-pass) trust. Using this formula, if you died now, since there is no estate tax in 2010, 100% of your estate would pass to the surviving spouse, and nothing would go to the trust. Again, this is probably not what was intended when you signed the document.

With neither formula do you get the result that was intended when you signed your estate plan. Thanks to our venerable Congress’s failure to act with regard to the estate tax prior to the end of 2009, your plan now has a serious problem.

Remember, this type of planning was done to save estate taxes, specifically to use both spouses’ exemptions from the federal estate tax. In most cases, the only purpose of including a by-pass or credit shelter trust was to save estate taxes. It would not be good to saddle your surviving spouse with a trust to administer when the trust was completely unnecessary to save taxes and was funded only because of Congress’s current shenanigans.

The solution is to amend the formula provision. There is not sufficient time to revisit your whole plan. As an immediate "band-aid" fix, if your plan contains a formula division, you should contact your attorney to make a simple codicil to your will or amendment to your trust. The codicil or amendment should provide that if you die in 2010 when the estate tax and generation-skipping tax do not apply to your estate and if these taxes are not retroactively reinstated by Congress, any computations required to apply the formulae in your plan shall be made as if the Internal Revenue Code in effect on December 31, 2009 is then in effect.

If you make a change like this, your plan will be the same as when you signed it. That may or may not be good for you. Depending on when you created the plan, the federal exemption may have been $600,000. In 2009 it was $3.5 million. That’s a big difference. Maybe you don’t really want to direct up to $3.5 million where you had directed $600,000 before. If that is the case, you need a complete review of your plan, not just a band-aid fix.

The objective is to make sure your plan works and makes sense in 2010 until Congress acts, if it does. Don’t delay. This needs attention.