Historically, the Federal Estate Tax has been a fact of life (or, rather, a fact of death) for many Americans who have amassed substantial assets during their lifetimes. This tax is levied on the estates of decedents, and could consume almost 50 percent of a decedent’s net worth, above a statutorily determined exempt amount. By applying estate planning techniques skillfully, the taxpayer could minimize the impact of such taxes on their beneficiaries and heirs. Such techniques have included pre-death gifting, estate splitting, valuation limitations and the creation of such vehicles as irrevocable life insurance trusts and family limited partnerships – taking into account the taxpayer’s net worth, the liquidity of the estate assets, then-current or projected estate tax deductions and the projected year of the taxpayer’s death. (This writer has told clients, “If you promise to die in the right year, I promise there won’t be any estate tax.”)
During recent years, the amount of a decedent’s estate not subject to Federal Estate Tax (i.e. the exempt portion) has changed significantly. In 2001, for example, the exemption was $675,000. This meant that no tax was levied on the first $675,000 of the decedent’s net worth. By 2006, the exemption had climbed to $2 million. In 2009, the exemption was $3.5 million.
The Federal Estate Tax expired in 2010. If a taxpayer dies this year, there will be no Federal Estate Tax imposed. The tax re-appears in 2011, with an exemption of $1 million – down significantly from last year’s exemption.
Tax experts expect Congress to reinstate the Federal Estate Tax during 2010. After all, it costs the Federal Government big bucks to wage wars, give bailouts and generally provide governmental services, and dead people don’t have a strong lobby in Congress.
If the tax is reinstated this year, what will be the new exemption? We don’t yet know. Some people believe the exemption will be close to last year’s $3.5 million. Others expect the exemption will be lower, somewhere between $3.5 and $1 million.
All of this uncertainty makes it difficult to develop an estate plan which will minimize the payment of Federal Estate Tax. Prudent tax planning will necessitate discussions with tax experts, attorneys and other financial professionals.
Jerry Kessler practices law in Santa Clarita. He can be reached at 661-255-1001.