Estate Planning: What You Need to Know as the Curtain Closes on 2008
Planning the distribution of your estate is never easy. There are many considerations, including the emotional decisions that need to be made, as well as the practical components such as titling, funding, and minimizing your ultimate estate tax liability. Some of the most pragmatic considerations are contained within the tax law, which is expected to change in 2009.
In 2008, the IRS allows each individual to pass $2,000,000 of assets free from estate tax upon their death. This amount is currently referred to as the estate tax exemption, and in 2009, it’s scheduled to increase to $3,500,000. Since married couples typically receive a marital deduction upon the first to die, estate tax is not due until the surviving spouse passes away. Non-married individuals who pass away with an estate greater than the exemption amount are subject to a 45 percent estate tax in 2008 and 2009. As the law currently stands, 2010 will bring a full repeal of the estate tax, but only for one year.
Why? Because when the law was enacted in 2001, there wasn’t enough government support to pass a bill with continued estate tax repeal. Therefore, Congress passed a bill with this “sunset” provision in order to get it passed, in the hopes it would become permanent in future years. Therefore, on January 1, 2011, the estate tax is reinstated, but reverts back to 2001 law where the exemption was $1,000,000 per person and the top estate tax rate was 55 percent. Although many estate planning professionals working in this area have made predictions regarding what will happen with the estate tax, the consensus is that during 2009, there will be some type of permanent legislation enacted.
Instead of a full repeal of the estate tax, many professionals are predicting the exemption will be locked in anywhere from $2,000,000 to $5,000,000. (The amount will vary depending upon the outcome of the November election.) Some forecast that the current maximum estate tax rate of 45 percent will decline, even saying that it has the potential to be tied into the capital gains rate. However, because of the current economic climate, it’s unlikely that, if it does fall, it will fall much below the top individual rate.
Other potential changes include (1) reverting to a unified system between the estate and gift tax systems and (2) “portability” or utilization of the exemption amounts upon the second death rather than per person. Up until 2004, the estate tax system and gift tax system were unified, meaning that the exemption amount could be used either during your lifetime, or upon your death. Today this isn’t the case. During 2008, a person can choose to use up to $1,000,000 of their exemption during their lifetime, but the remaining $1,000,000 must stay intact until their death. Reinstating the unified system would be beneficial to many, as it would allow individuals to give more to their heirs during their lifetime without gift tax consequences
The second item, portability, would be a huge win for taxpayers. Because the current exemption amount is “per-person” versus “per-couple,” careful planning is necessary in order to make sure that each spouse has enough assets titled in his or her own revocable living trusts to fully use the exemption amount. This can be difficult for some clients, because there may not be optimal assets to assign to their trusts (such as a closely held company with buy-sell agreements, tax deferred accounts, etc.). Portability would simplify this process significantly.
Draft an estate plan. This would include a will, revocable living trust, medical or health care patient advocate, and power of attorney.
Review your documents. Your documents should be reviewed every 3–5 years or after significant life events, such as retirement or a death in the family, to determine if the provisions within them still make sense.
Review the titling of your assets. If you’re single, ensure that non-beneficiary designated assets are properly titled in your revocable living trust in order to avoid probate. If you’re married, review titling to make sure that you’re not only avoiding probate, but also that your assets are divided between you and your spouse to maximize each of your estate exemption amounts, minimizing the amount of estate taxes upon the second death.
Consider estate tax. Will you have estate tax due upon your death or upon the second death of you and your spouse? If so, determine if there’s enough liquidity in your estate to pay this tax, which is due nine months after death. This is important, as you don’t want to put your family or trustee in a situation to hold a “fire sale” of your assets in order to pay the taxes due.
The Current Law
In 2008, the IRS allows each individual to pass $2,000,000 of assets free from estate tax upon their death. This amount is currently referred to as the estate tax exemption, and in 2009, it’s scheduled to increase to $3,500,000. Since married couples typically receive a marital deduction upon the first to die, estate tax is not due until the surviving spouse passes away. Non-married individuals who pass away with an estate greater than the exemption amount are subject to a 45 percent estate tax in 2008 and 2009. As the law currently stands, 2010 will bring a full repeal of the estate tax, but only for one year.
Why? Because when the law was enacted in 2001, there wasn’t enough government support to pass a bill with continued estate tax repeal. Therefore, Congress passed a bill with this “sunset” provision in order to get it passed, in the hopes it would become permanent in future years. Therefore, on January 1, 2011, the estate tax is reinstated, but reverts back to 2001 law where the exemption was $1,000,000 per person and the top estate tax rate was 55 percent. Although many estate planning professionals working in this area have made predictions regarding what will happen with the estate tax, the consensus is that during 2009, there will be some type of permanent legislation enacted.
Possible Changes in 2009
Instead of a full repeal of the estate tax, many professionals are predicting the exemption will be locked in anywhere from $2,000,000 to $5,000,000. (The amount will vary depending upon the outcome of the November election.) Some forecast that the current maximum estate tax rate of 45 percent will decline, even saying that it has the potential to be tied into the capital gains rate. However, because of the current economic climate, it’s unlikely that, if it does fall, it will fall much below the top individual rate.
Other potential changes include (1) reverting to a unified system between the estate and gift tax systems and (2) “portability” or utilization of the exemption amounts upon the second death rather than per person. Up until 2004, the estate tax system and gift tax system were unified, meaning that the exemption amount could be used either during your lifetime, or upon your death. Today this isn’t the case. During 2008, a person can choose to use up to $1,000,000 of their exemption during their lifetime, but the remaining $1,000,000 must stay intact until their death. Reinstating the unified system would be beneficial to many, as it would allow individuals to give more to their heirs during their lifetime without gift tax consequences
The second item, portability, would be a huge win for taxpayers. Because the current exemption amount is “per-person” versus “per-couple,” careful planning is necessary in order to make sure that each spouse has enough assets titled in his or her own revocable living trusts to fully use the exemption amount. This can be difficult for some clients, because there may not be optimal assets to assign to their trusts (such as a closely held company with buy-sell agreements, tax deferred accounts, etc.). Portability would simplify this process significantly.
What Can You Do?
Draft an estate plan. This would include a will, revocable living trust, medical or health care patient advocate, and power of attorney.
Review your documents. Your documents should be reviewed every 3–5 years or after significant life events, such as retirement or a death in the family, to determine if the provisions within them still make sense.
Review the titling of your assets. If you’re single, ensure that non-beneficiary designated assets are properly titled in your revocable living trust in order to avoid probate. If you’re married, review titling to make sure that you’re not only avoiding probate, but also that your assets are divided between you and your spouse to maximize each of your estate exemption amounts, minimizing the amount of estate taxes upon the second death.
Consider estate tax. Will you have estate tax due upon your death or upon the second death of you and your spouse? If so, determine if there’s enough liquidity in your estate to pay this tax, which is due nine months after death. This is important, as you don’t want to put your family or trustee in a situation to hold a “fire sale” of your assets in order to pay the taxes due.
