It's Time to Start Thinking About Estate Taxes Again

In 2001, the Economic Growth and Tax Relief Reconciliation Act triggered a gradual increase in the dollar threshold of estates subject to the estate tax. In tax years 2007 and 2008, estates valued at more than $2 million may be taxed as much as 45 percent, while in tax year 2009, the threshold will increase to $3.5 million. In 2010, the tax will be repealed for a year.

However, in 2011, unless Congress acts, the party’s over. The estate tax will revert to a top rate of 55 percent on estates at a significantly lower threshold – $1 million.

While bills continue to swirl around and many expect a Band-Aid of some sort before 2011, no one believes Congress will eliminate the so-called “death tax” altogether. That makes it tough for individuals to set a clear course for their own estate planning. If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets should continue to grow over time, and your estate may turn out to be larger than you may think. We are available to discuss your estate planning issues, needs and goals and can coordinate planning with your estate and tax specialists.

Here are some things to keep in mind as you plan those conversations:

Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, you can create an irrevocable life insurance trust to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may allow spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means you can not change your decision.

If you expect your assets to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust that is popular among families with growing assets, because you can pass such appreciation on to heirs with minimal tax consequences.

Prepare a gifting strategy: Under current law, an individual can leave unlimited amounts to a spouse or to charity free of federal estate tax. Other heirs can receive up to $2 million, tax-free, when deaths occur in 2007 or 2008 (however, this does not include any applicable state taxes due). If your assets are over the estate tax limit, it might make sense to devise a gifting strategy that spends down your total taxable estate while still allowing you a comfortable lifestyle. You might, for instance, consider paying directly for someone else’s medical bills or education tuition. No gift tax applies for these items, so payments can be unlimited.

If you have any questions, or would like to schedule an appointment to discuss your estate planning situation and goals, please call your advisor.