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It's Time to Start Thinking About the
Estate Tax Again
Back 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. The year after that,
the tax will be repealed for a year.
However, in 2011, unless Congress acts, the party's over. The
estate tax will be reset at up to 55 percent on estates at a
significantly lower threshold — $1 million.
While bills continue to swirl around Congress and many expect
a Band-Aid of some sort before 2011, no one seems to believe
that the so-called "death tax" is likely to be
eliminated 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 may be expected to grow over
time, and your estate may turn out to be larger than you may
think. You should be talking to estate and tax specialists as
well as financial advisors such as Certified Financial Planner™
professionals.
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, an irrevocable
life insurance trust can be created to keep the proceeds of the
insurance out of your taxable estate. An added benefit is that
such trusts may permit spousal access to the cash value of the
policy. Yet note the word "irrevocable" — it means a
decision that cannot be changed.
Consider if your assets are expected to increase. A
grantor-retained annuity trust, or GRAT, is an irrevocable trust
that is popular among families with assets that are expected to
increase, because such appreciation can be passed on to heirs
with minimal tax consequences.
Prepare a gifting strategy. Under current law,
unlimited amounts can be left to a spouse or to charity free of
federal estate tax. Other heirs can receive a total of $2
million, tax-free, when deaths occur in 2007 or 2008. 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 making direct payments for someone
else's medical bills or education tuition. No gift tax applies
for these items, so payments can be unlimited.
January 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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