Will Estate Taxes Rise from the Dead?
They say nothing is certain in life except death and taxes. That makes the estate tax, sometimes called the "death tax," especially painful. Uncle Sam imposes a lifetime of taxes on us. So why should he impose one last tax on the privilege of dying?
Estate tax exemptions have been rising and rates have been falling gradually since the start of the Bush administration. For 2009, the so-called "unified credit" amount that you could pass tax-free was $3.5 million, which meant that only a tiny fraction of American estates paid. But the tax itself was a still-whopping 45% of anything above that $3.5 million exemption! That kept legions of estate planners busy devising an alphabet soup of complex strategies (including ILITs, SCINs, CHICs, and the ever-popular GRITs, GRATs, and GRUTs) to beat the tax.
The federal estate tax actually expired on January 1, 2010. But it rises from the dead, like the slasher in a teen horror film, effective January 1, 2011. At that point, the tax will rise as high as 55% of estates over $1 million. And even in today's down economy, it's easy for the value of your home, investment and retirement accounts, and life insurance to top $1 million.
Congress is currently working on efforts to ease the coming bite. Democrats, led by President Obama, have called for a return to the $3.5 million exemption and 45% rate. Republicans, not surprisingly, like the situation where it is right now. The House has passed legislation returning the tax to its 2009 level, while the Senate is close to passing a bill with a $5 million exemption and 35% rate. And don't be surprised if the final bill makes the tax retroactive to the beginning of this year! Stay tuned for more developments.
Regardless of where the estate tax ultimately settles, the key to minimizing it - just as with the income tax - is planning. But the rise of the estate tax illustrates the need for ongoing planning, too. Unfortunately, it's not enough to just craft a plan and set it in stone. We have to monitor that plan in light of changing circumstances. And in this economy, we can be certain that overall taxes are going up, which makes ongoing planning all the more important.
We'll keep you posted on the changing estate-tax landscape. And when you're ready for your tax plan, just call us.
