Last Updated: January 12, 2009
If you were among those Americans who were planning on the estate tax disappearing for one year in 2010, it might be time to revisit that plan. President-elect Barack Obama and congressional leaders plan to move quickly to block the estate tax from disappearing in 2010, according to a recent Wall Street Journal report.
Under current law, the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) lets estates with total asset values below $3.5 million in 2009 to pay no federal estate tax and the federal estate tax is entirely eliminated for people dying in 2010. However, under the sunset provision of the Act, in 2011, the federal estate tax rates and exemption amount reverts back to the January 1, 2001 rules. The pre-2001 limits were $1,000,000 per person exemption and a top marginal rate of 55 percent with a 5 percent surtax to eliminate the benefits of the $1,000,000 exemption on estates of over $10,000,000.
But under the Obama plan detailed during the campaign, the Wall Street Journal reported that estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million — $7 million for couples — from any taxation. The value of estates above that would be taxed at 45 percent.
So given the possibility that President-elect Obama gets his way, what should you do with your estate?
If, in fact, Congress locks in the current 2009 federal estate tax thresholds, then the estate planning techniques that have been used for the past 20 years or so will continue to be applicable, said Robert Geurden a partner at Brier & Geurden,LLP.
In general, estate-tax attorneys and financial planners suggest several techniques to reduce the size of estates, including credit shelter trusts, life insurance trusts, gifting, family limited partnerships, and charitable bequests. "Make some lemonade out of lemons," said FPA member Curt Weil, CFP®, president of Lasecke Weil Wealth Advisory Group, LLC. He recommends the use of the personal unified credit, currently one million dollars, to gift real estate and securities to an irrevocable trust for the benefit of heirs. "Since both real estate and securities are way down in value, you get a double benefit: reduce the taxable estate and do so at a discount," he said.
In addition, Weil suggests to meet with an estate planning attorney to review the benefits of a grantor
retained annuity trust.
But the best technique may be time. "I would continue to give my clients the same advice I have been giving them all along - start planning early," said Geurden. "A well thought-out estate plan can help clients to achieve their family goals as well as reduce or eliminate the tax."
To be sure, it may be impossible for you to eliminate all estate taxes. For instance, many states have their own estate tax laws. However, Geurden said that such taxes can be avoided or reduced using many of the same techniques used to avoid or reduce federal estate taxes.
And in cases where your estate is so large that you cannot eliminate taxes altogether, Geurden suggests
that a "well-designed plan can ensure that enough liquid assets are available to pay the taxes."
Indeed, many financial planners have horror stories about beneficiaries being forced to sell illiquid investments to pay estate taxes due.
Geurden did, however, suggest that there's a silver lining to the federal estate tax:
"Capital assets that are included in an estate for estate tax purposes receive a 'step-up' (or down) in basis to the fair market value of the property on the valuation date for estate tax purposes."
"This change in basis applies even if the estate is not required to pay estate taxes because, for example, the estate is under the exemption amount; or because enough property is passing to a surviving spouse and qualifies for the estate tax marital deduction; or is passing to charities and qualifies for the charitable deduction."
"For smaller estates, those worth under $2 million to $7 million (depending on the amount of the exemption finally allowed by Congress), the benefit of this step-up in basis can outweigh the burdens of the estate tax. If the 'repeal' of the estate tax is allowed to remain permanent, the benefits of the 'step-up' in basis would be eliminated. The step-up/step-down in basis is a two-edged sword, and right now, some of the planning involves preserving an older basis where the value of an asset has declined significantly."
"As with all things related to financial planning, you should consult with a qualified professional before creating any estate plan. Also, consider reading these resources already posted on FPA's Web site: "Make Estate Plans to Benefit Yourself and Your Loved Ones" and "Why You Need an Estate Plan."