The dream of estate tax elimination is over |

The dream of estate tax elimination is over

E. Brian SingerInside BusinessAspen, CO Colorado

George W. Bush and the Republicans created the impractical and false hope that the estate tax would be eliminated. The consequence of not recognizing the impossibility of obtaining sufficient support by the Senate is that some wealthy Americans will be saddled with millions of dollars in estate tax that might have been avoided. The estate tax is levied on the fair market value of everything you own at the time of your death. This includes homes, business interests, ranch and farm property, marketable securities, art, jewelry, improperly structured life insurance policies, certain beneficial interests in trusts and virtually anything with financial value. The primary way to reduce your estate tax is to die owning fewer assets. Most advanced techniques are designed to move assets out of your estate while you are alive without triggering a gift tax to avoid estate taxation on those assets at your death. This is normally accomplished over a period of years. In some cases, the estate can be reduced to the point where there is no estate tax to be paid. During the last eight years, some wealthy Americans erroneously delayed planning and lost the opportunity to move assets out of their estates gift-tax free.Its a new world, both politically and economically. Those who continue to sit on the planning sidelines need a reality check. Failure to adjust to the new reality will be costly in terms of unnecessary taxes. The sooner estate tax planning is addressed, the sooner a person can begin moving assets to the non-taxable side of the ledger. Barack Obamas platform was to have a permanent estate tax exemption of $3,500,000 and a maximum estate tax rate of 45 percent. With the Democrats increasing control in both the House and the Senate, there is strong reason to believe that those levels will come to fruition. Prior to Obama taking office, the country already was drowning in debt. There is little reason to believe the estate tax will be repealed or reduced in the near future. On the contrary, pressure is being exerted for stronger enforcement of existing estate and gift tax rules regardless of what level the estate tax exemption and tax rate stabilizes. There is more of an appetite to aggressively collect taxes from those who can pay, especially when those taxes are taken at death. Estate taxes are under the radar for most Americans. When the media talks about a 45 percent tax rate, we need to ask 45 percent of what? There is much discussion and at least one bill has been introduced to eliminate long-standing planning techniques. For example, the first estate tax reform bill, H.R. 436, was introduced on Jan. 9. This bill would permanently reform the estate tax, eliminate estate tax repeal in 2010 and lock in the applicable exclusion amount at $3,500,000. The bill also would make the top tax rate 45 percent for estates up to $10,000,000 and would impose a 5 percent surtax on the portion of an estate in excess of $10,000,000 and not over $41,000,000.Finally, it will eliminate or curb valuation discounts for closely-held entities that hold non-business assets and eliminate valuation discounts for minority interests in entities by taking into account ownership by other family members. While the exemption and tax rate may remain at $3,500,000 and 45 percent, respectively, the elimination of planning techniques has the same effect as increasing the estate tax. The way the law stands, unless legislation is enacted, the estate tax will disappear for one year in 2010. Starting Jan. 1, 2011, the law reverts back to the pre-2001 rules when the exemption was only $1,000,000 and the estate tax rate was 55 percent. For this reason, and because presidents are usually more effective at passing legislation in the early part of their term, it is likely that major estate tax reform will occur in 2009. Hopefully, any changes will apply to transactions entered into after the date of enactment. There is no way to guarantee that changes will not be applied retroactively to some date prior to enactment. If uncertainty in the tax law and economy is your excuse to delay planning, then you better think twice. What happens if you die before these uncertainties are resolved? Do you realize that your estate assets may have to be sold to pay estate tax? In many cases, tax laws are less important than the orderly disposition of a persons estate. Many Americans have seen a considerable decline in estate values over the past year, and you may be one of them. Your estate plan may be outdated and no longer work as intended. Consider this example: A husband dies in 2009 and his wife survives. The husbands will leaves the exemption amount, whatever it is at the time of his death, to his children or to a trust for his children. The balance goes to his wife. The husbands net worth was $8,000,000 when the will was drafted and the exemption amount was $2,000,000. At the time of the husbands death his net worth decreased to $5,000,000. His children will get $3,500,000 and his wife will get $1,500,000. Considering the husband and wife were married for 40 years, this was most likely not the initial intention.With Obama in office, increased control by the Democrats in both the House and Senate and a growing deficit, estate tax repeal is not likely. If you want to pay little or no estate tax you will need to devote time and financial resources. On the positive side, it will take much less effort to preserve your wealth for your family and favorite charities than it took to accumulate your wealth.

Brian Singer specializes in wealth transfer strategies for the affluent. He can be reached at article is a feature of Inside Business, published Tuesdays in The Aspen Times.

Support Local Journalism

Support Local Journalism

Readers around Aspen and Snowmass Village make the Aspen Times’ work possible. Your financial contribution supports our efforts to deliver quality, locally relevant journalism.

Now more than ever, your support is critical to help us keep our community informed about the evolving coronavirus pandemic and the impact it is having locally. Every contribution, however large or small, will make a difference.

Each donation will be used exclusively for the development and creation of increased news coverage.

For tax deductible donations, click here.

Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.

User Legend: iconModerator iconTrusted User


See more