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The Federal Death Tax Might Be Taking a
Holiday, But Keep an Eye on Your State's Estate and Inheritance
Tax Policy
With the 24/7 rush to get health care reform legislation
through the U.S. Senate in the waning days of 2009, Congress let
the federal estate tax die for 2010 as planned by the Bush
Administration back in 2001. That's not expected to stay the
case for long many experts anticipate that Congress will
re-apply exemption levels with retroactive legislation sometime
this year to help tame rising deficits.
But, individuals and families should keep their eye on
another big estate tax issue a potentially huge hit from their
home state.
A recent report in The Wall Street Journal says
taxpayers with significant assets need to keep a close watch on
what's going on with their home state's exemption levels because
most states with estate or inheritance taxes haven't matched the
federal exemption levels of recent years. For example, in 2009,
all individuals with less than $3.5 million in assets and
married couples with less than $7 million were exempt from
federal estate taxes this is likely to be the level that
Congress may act to reinstate this year.
Working with estate attorneys, tax experts and financial
advisors such as CERTIFIED FINANCIAL PLANNER professionals
can help individuals determine their estate tax situation, an
even more important issue now that many states have significant
budget woes and may be looking for more revenue to fix them. For
some individuals and families, there may be no adjustments in
estate tax strategy, but others in extreme circumstances might
be advised to move out of state to avoid a potentially big
impact.
Individuals and couples should also realize that Congress is
considering eliminating the federal deduction for amounts paid
for state estate taxes. It's expected to affect individuals with
more than $3.5 million in assets, but it's potentially another
big hit.
According to CCH Wolters Kluwer, 17 states and the District
of Columbia currently impose estate taxes. Eight states have
inheritance taxes, which are levied on heirs, not estates.
Maryland and New Jersey have both.
Every state puts its own wrinkle on estate tax issues, and
that's why it's particularly important for retirees not only to
check how those laws might affect their assets if they settle in
a particular state for good.
One possible solution is a bypass trust a trust that
essentially allows the assets of a deceased spouse to access a
trust that can be drawn on by the survivor. When the spouse
dies, the assets in the trust can go tax-free to designated
heirs, preserving the benefit of both individual exemptions. In
other words, if a married couple lives in a state with a $1.5
million individual exemption and establishes such a trust, it
would allow them to pass as much as $3 million to their heirs.
Additionally, purchasing life insurance is an effective estate
planning technique and is regarded by some experts as the safest
way to avoid estate taxes, particularly if the insurance is
purchased within an irrevocable life insurance trust.
As the federal government and states start flipping their
taxpayers' couch cushions for more revenue, experts say it's
also important for individuals and couples to be particularly
careful about domicile issues the actual amount of time
individuals live (and therefore can be taxed) in a particular
state. In an audit, revenue officials might check the minute
details on a taxpayer's lifestyle to determine where they owe
tax car registrations, club and church memberships, health
care providers, burial sites and voting records. In other words,
the tax planning behaviors of the mega-rich are increasingly
becoming relevant for the borderline rich.
One more thing to watch Congress may eventually act to
diminish or eliminate other methods long used by individuals and
couples to cut estate taxes. Reports have surfaced that family
limited partnerships, grantor retained annuity trusts (GRATs)
and qualified personal residence trusts (QPRTs) might go the way
of the dodo since they provide the means to freeze or cut the
value of assets being transferred out of the owner's home state.
Taxpayers concerned about their estate tax situation might
also bring another key group of people into the discussion their heirs.
When talking about extensive assets, it's good to discuss the
tax situations of the giving and the receiving parties to make
sure the chosen solutions are best for both sides. It is best to
hold a financial planning family meeting to discuss charitable
giving intentions, and the protection of the total family's
wealth. Clear communication on planning strategies will ensure
maximum family wealth preservation.
January 2010 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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