Estate Taxes: 2011 and Beyond… | Moneta

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I am continually amazed at how often prognosticators and talking heads prove to be wrong when it comes to predictions about the economy, taxes and all things financial.  By now, most people are aware that the estate tax situation in this country is ‘up in the air,’ to put it mildly. Those who love to make predictions said that the estate tax problem would have been ‘fixed’ by now, but instead, nothing had been resolved as of this writing.

As you may recall, during President George Bush’s first term, the estate tax exemption (per taxpayer) was set at $675,000.  It rose on an annual basis, ultimately topping out at $3,500,000 in 2009.  Essentially, this exemption allowed a single taxpayer to pass the amount of the exemption to his or her heirs without any estate tax liability.  Using some basic estate planning techniques, a married couple could shelter two times the exemption from taxes.  Any funds in an estate in excess of the exemption amount would be taxed at the estate tax rate of 45 percent.

A provision included in the law which repealed the exemption eliminated any estate tax in 2010. It is a bit misleading, however, as capital gains in excess of a $1.3 million per taxpayer were subject to taxes. In essence, a person with $100,000,000 of non-appreciated property could pass the entire amount to heirs without a tax bill in 2010.  Outstanding! But wait! What happens in 2011?  The estate tax exemption reverts to $1 million per taxpayer, and the tax rate on anything above that amount increases to 55 percent

The estate tax exemption reverts to $1 million per taxpayer, and the tax rate on anything above that amount increases to 55 percent  But how can this happen?  If you listened to the ‘experts’ on this subject just one year ago, you would have heard them say there was no chance the exemption amount would be completely repealed in 2010 or that the exemption amount would have been reinstated in 2011 at $1 million with a higher tax rate.  At a minimum, these ‘experts’ said, Congress will ‘freeze’ the exemption amount at $3.5 million going forward.  Well, as we have found out, the crystal ball doesn’t exist and future predictions are never a place to anchor your plans.  In the last few years there have been a myriad of issues that have trumped estate tax plans for members of Congress: Unemployment numbers, economic recession, stimulating the economy, etc., have all taken priority.  There is no politician that I can envision given the current economic environment, who will be going to their constituents and telling them they are going to “fight to reduce taxes for the rich when they die.”

So what do we do now that the exemption will revert to the $1 million mark?  There are a host of planning opportunities that can shelter as much of an estate as allowed.   Some common strategies families use to reduce the size of their taxable estate/utilize their exemption amounts are:

  • Creation of individual trusts and proper titling of assets
  • Annual gifting to eventual heirs
  • Increased charitable giving (pre-and post-death)
  • Irrevocable Life Insurance Trusts
  • Family Limited Partnerships

These and other strategies can and should be considered in the appropriate situation.  However, I’m not sure it is prudent to go out and make extensive changes to family’s current estate plan until there is some clarity regarding the eventual course of action Congress will take.  As soon as you think you know what will happen, the opposite occurs, or nothing happens at all.

It will be important to meet with your Family CFO in the first quarter of 2011 and review what changes—or lack of them—are appropriate for your family.

Dorn, Tony square

Tony Dorn, CFP®, MBA

Tony is the professional consultant for Katie Kearins.