Why Estate Tax Planning Makes Sense Even In Year Without the Tax
Now that George Steinbrenner, legendary owner of the New York Yankees, the fourth known American billionaire has passed on this year, a bill has been introduced in Congress called the Responsible Estate Tax Act which would, among other things, retroactively apply the federal estate tax to estates of his size where the decedent died this year. This year 2010 is, of course, the year when the federal estate tax goes into hiding for one year before reappearing at the stroke of midnight going into 2011.
Even if the Responsible Estate Tax Act, which was introduced by Bernie Sanders, an Independent from Vermont, does not pass – and I suspect it will not pass – consumers should watch closely. Delaying to see what will happen to this federal tax is not necessarily the best strategy.
For those who are following legislative activity on the federal estate tax, here is a simple test whether these laws could affect you.
First, take the value of everything you own. If you are married, include everything that your spouse owns also. Include your home, both of your IRA’s, 401(k)’s and other retirement accounts. Count investment accounts, stocks, bonds, and checking and savings as well as any other real estate, business interests and any money that might come due to you or your spouse because of inheritances not yet received or lawsuits not yet resolved. Then, add to the number any life insurance payable on your deaths. Deduct debts. Then, look at the number. This is, generally speaking, your and your spouse’s net worth.
If there is any reasonable chance that, at the death of the second of you to die, that is at your death if your spouse dies first or at your spouse’s death if you die first, that the number will be over $1 million as adjusted for inflation, then you should at least consider federal estate tax planning now. If there is a reasonable chance that the number will be over $3.5 million, then you should definitely look at federal estate tax planning if you care about the heirs who will inherit after you and your spouse. Here is why.
1. If Congress does nothing, then the federal estate tax will return for estates over $1 million with a 55% rate for sums over a million. When families do not realize they have estates over $1 million, this is often because they fail to take into account IRA’s, 401(k)’s, life insurance and other assets. As between spouses, the surviving spouse does not need to worry because he or she has an unlimited exemption from tax. Those directly affected are your children.
For an estate of $1,400,000, for example, the tax to the children would be $220,000. An estate of $3,000,000 would bring with it an estate tax liability of $1,100,000. This is before considering other taxes such as Pennsylvania Inheritance Tax and taxes on IRA and 401(k) distributions which would be additional.
It is surprising that people who might watch their grocery and cable bills might miss the opportunity to plan now because they are delaying to see where events might go.
2. If Congress acts, one likely result is taxation of estates over $3.5 million. If the most common proposal and the one contained in the Bernie Sanders proposed legislation were adopted, which is to return to last year’s standard of taxation of estates over $3.5 million, then many consumers might think they are safe. If their estate is over $1 million but less than $3.5 million, they might not watch. There are a few reasons why this might not be a good idea.
First, when dealing with married couples it is necessary to consider what the estate might be on the death of the second spouse. Second, for several reasons Congress might not act.
3. It is July and national elections will be held November 2, 2010. Any movement now on the federal estate tax could be interpreted as voting in favor of taxes by an opponent. All 435 seats in the House of Representatives are vulnerable and 36 seats in the Senate. In 2001 when the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed, it was assumed that the 2009 through 2011 issues would have been dealt with in a few years. Close to 10 years later they have not yet been resolved. It is a short jump from the November elections until the end of the year.
Inertia would allow the 2010 losses from billionaire estates to continue and then reinstatement at the $1 million figure next year. Waiting to December 31 may not be a good idea.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.