New Estate Tax Rules

Congress recently passed new regulations that heralded the elimination of estate taxes. Unfortunately, this had more political and media hype than substance. Under the former rules, the "unified credit" allowed a person to pass $675,000 estate tax free at death, and the amount increased to $1 million in 2006. With proper estate planning, a married couple could shield twice the amount.

Under the newest estate tax law, the amount you can pass to heirs estate tax free increases, as follows:

2002 $1.0 million/$2.0 million
2004 $1.5 million/$3.0 million
2006 $2.0 million/$4.0 million
2009 $3.5 million/$7.0 million

Finally, the estate and generation-skipping transfer taxes are "repealed" after 2010. What's more, under the new tax law, the top estate tax rate slowly decreases, from 50% in 2002 to 45% in 2009. Retained in the tax code is the gift tax; eligible lifetime transfers will be taxed at the rate of 35% beginning in 2010.

You may be thinking that you will never amass assets worth more than $3.5 million, or $7.0 million if you include your spouse's assets. And, if you're under a certain age, you're probably fairly certain that you'll live past 2010. Add those together and your conclusion may be that an estate plan is unnecessary. And that could be a sizable mistake, for several reasons.

First, if the current the federal budget "surplus" evaporates, the scheduled repeal of the estate tax may not occur. In fact, the legislation contains an automatic sunset provision. Without an act of Congress, the new laws on estate and generation-skipping tax will disappear at the end of 2010, and the rules in effect in 2001 will be reinstated.

Second, there are other provisions in the new tax law, such as a change in how beneficiaries will calculate the "basis" of assets, that may not prove to be all that popular. It's possible that Americans may not wish to see the "new system" remain in place once they understand more about how it works.

Third, a well-structured estate plan addresses needs other than tax reduction, such as debt payment, asset investment and distribution of assets upon your incompetency or death. If you fail to make provisions for these, the legislature has a plan for you that will be put into effect through the local probate court.

The bottom line: If the phased-in increase in the sum Americans can pass to heirs estate tax free remains in force after 2010, it will make estate planning easier, since the issue of taxes for most Americans will have been eliminated. However, the issues of asset management, business succession, providing for children of a prior marriage, providing for improvident children or children while they are minors will all still exist, and are likely more important issues to citizens than a debt called taxes.

If you'd like to review how the newest iteration of the estate tax laws might impact your ability to provide for your family, please contact us.


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