In a late 2009 article in The Birmingham News, I predicted that Congress would extend the 2009 estate tax rules rather than allow the scheduled repeal of all estate taxes to take effect. I was wrong…maybe. It’s true that Congress failed to take any action which means that currently there are no estate taxes no matter what size your estate. This means that if Donald Trump and his wife died this year instead of receiving potentially hundreds of millions of dollars in estate taxes, the federal government would receive nothing and his heirs would receive the entire estate tax free! Maybe…maybe not. There is discussion on Capital Hill suggesting Congress will change the law later this year and make it retroactive to January 1, 2010. If this were to occur, you can bet someone will challenge it on constitutional grounds. Resolution would likely take years and eventually be settled by the Supreme Court.
To put the current law in perspective, the estate tax laws for 2009 exempted up to $3.5 million from estate taxes for individuals and with proper planning, a married couple could exclude up to $7 million. In addition, estate beneficiaries received a ‘stepped-up’ tax basis on inherited assets, meaning the market value of all estate assets was re-set based on the date of death, eliminating capital gains taxes on immediate sales and eliminating the need for record-keeping on tax basis. Under the 2010 law, up to $1.3 million of assets receive a stepped-up basis’ while the excess amount is subject to capital gains taxes at the time of sale. Certain spousal transfers receive an additional $3 million of stepped-up basis.
Should Congress fail to take action this year, the current estate tax law is automatically repealed and on January 1, 2011 the estate tax exemption would revert to $1 million causing millions of middle-class Americans to be subject to taxes they never anticipated.
If you feel like you’re locked in a dark room seeking answers from a Ouija board, you’re in good company. Congressional inaction has made it almost impossible to make effective plans and doing nothing could create disastrous results for your family. For example, many wills use a ‘formula’ stating the maximum exemption amount goes to a by-pass trust (that often has children as the beneficiaries) with the balance going outright to the spouse. For this year that means that all of the money would go to the family trust, potentially leaving the spouse out entirely!
With all of this uncertainty, what exactly should you do? Your best choice is to contact your attorney or financial advisor and review your current estate plan to determine if you could potentially be adversely affected. Second, consider writing your congressional representative and demand that he or she bring permanent resolution to this matter. This is what we pay them to do and it’s time they did their job. For a sample letter, visit the Resource Center at www.welchgroup.com; click on ‘Links’; then click on Estate Tax Letter to Congress. There’s also a link to the email address of your congressional representative.
Showing posts with label Estate Tax Laws. Show all posts
Showing posts with label Estate Tax Laws. Show all posts
Monday, February 15, 2010
Saturday, November 21, 2009
“Helping Charities While Reducing Taxes- Part I” - November 8, 2009
I recently met with a client couple as part of an estate planning review. As is true with so many people, this couple expressed a strong desire to give to charities both during their life and at their death. This week, I’ll focus on a strategy for giving to charities at death.
Often people will make charitable gifts by designating a Specific Bequest in their will. The typical logic is that they want to make sure that all of their assets are available for their support during their lifetime. Then, at the last of them to die, they want to make a gift, typically of a certain dollar amount, to their church, college or other charity. While this is pretty straight-forward planning, there may be an even better way to accomplish the same goal while significantly reducing taxes that will have to be paid by heirs.
Think of your own situation or maybe a family member. Do you (or they) plan to make charitable gifts at death? Instead of making a specific bequest in your will, consider making the same gift by using your retirement account. You see, contributing to a retirement account is one of the best ways to accumulate wealth during your working years because you receive a tax deduction for your contributions and tax-deferred growth until the funds are taken out during retirement. During retirement, people often leave as much money as possible in their retirement account in order to avoid income taxation on their withdrawals. As a result, they often die with money still left in their retirement account. However, a retirement account is one of the worst assets for an heir to receive. This is because not only are retirement accounts potentially subject to estate taxes, the heirs must also pay income taxes as they make withdrawals. For the wealthy, this combination of estate taxes of possibly as high as 55% and income taxes of possibly as high as 39.5% could eat up nearly 70% of your retirement account!
Here’s a strategy for making smarter testamentary gifts. Let’s assume that you and your wife have decided to leave your alma mater $100,000 at the last of you to die. Instead of making a specific bequest under your will, you change the beneficiary designation under your IRA account to reflect your wife as the primary beneficiary and your alma mater as the second beneficiary for $100,000 with the balance going to your children. If your wife predeceases you, your alma mater receives $100,000 and the balance goes to your children. If you die before your wife, she receives your entire IRA account and can ‘roll-over’ the account into her own name. She’ll then need to name your alma mater the primary beneficiary for the first $100,000 of the retirement account while naming the children the primary beneficiary for the balance. As a result, at her death, the charity receives the same amount of money, $100,000, from the retirement account instead of from the personal estate. You have effectively ‘given away’ the tax problem. Another advantage is that if you decide to make changes regarding your charitable contributions, changing beneficiary designations is easy and free while changing specific bequests under your will would require you to engage an attorney.
Often people will make charitable gifts by designating a Specific Bequest in their will. The typical logic is that they want to make sure that all of their assets are available for their support during their lifetime. Then, at the last of them to die, they want to make a gift, typically of a certain dollar amount, to their church, college or other charity. While this is pretty straight-forward planning, there may be an even better way to accomplish the same goal while significantly reducing taxes that will have to be paid by heirs.
Think of your own situation or maybe a family member. Do you (or they) plan to make charitable gifts at death? Instead of making a specific bequest in your will, consider making the same gift by using your retirement account. You see, contributing to a retirement account is one of the best ways to accumulate wealth during your working years because you receive a tax deduction for your contributions and tax-deferred growth until the funds are taken out during retirement. During retirement, people often leave as much money as possible in their retirement account in order to avoid income taxation on their withdrawals. As a result, they often die with money still left in their retirement account. However, a retirement account is one of the worst assets for an heir to receive. This is because not only are retirement accounts potentially subject to estate taxes, the heirs must also pay income taxes as they make withdrawals. For the wealthy, this combination of estate taxes of possibly as high as 55% and income taxes of possibly as high as 39.5% could eat up nearly 70% of your retirement account!
Here’s a strategy for making smarter testamentary gifts. Let’s assume that you and your wife have decided to leave your alma mater $100,000 at the last of you to die. Instead of making a specific bequest under your will, you change the beneficiary designation under your IRA account to reflect your wife as the primary beneficiary and your alma mater as the second beneficiary for $100,000 with the balance going to your children. If your wife predeceases you, your alma mater receives $100,000 and the balance goes to your children. If you die before your wife, she receives your entire IRA account and can ‘roll-over’ the account into her own name. She’ll then need to name your alma mater the primary beneficiary for the first $100,000 of the retirement account while naming the children the primary beneficiary for the balance. As a result, at her death, the charity receives the same amount of money, $100,000, from the retirement account instead of from the personal estate. You have effectively ‘given away’ the tax problem. Another advantage is that if you decide to make changes regarding your charitable contributions, changing beneficiary designations is easy and free while changing specific bequests under your will would require you to engage an attorney.
“Congress Plays ‘The Guessing Game’ With Our Estate Tax Laws” - November 1, 2009
Current law does not impose death taxes unless your taxable estate exceeds $3.5 million. That $3.5 million becomes unlimited for calendar year 2010 unless Congress takes action before year-end. This means that if Bill and Melinda Gates died next year, instead of the government receiving perhaps billions in death taxes, they would receive nothing…nada…zippo! And think of all the wealthy people who are in hospitals on life support. Avoiding millions in estate taxes would give a whole new meaning to 'Pull the Plug'! We all know the government is not going to allow this to happen, but time is fast running out.
Prior to the 2009 trillion dollar-plus deficit, both Democrats and Republicans had arrived at a consensus opinion that the estate tax exemption (the size estate you can own before you are subject to death taxes) should be set at $3.5 million dollars. The combination of distraction over passing healthcare reform and the almost incomprehensible rising national debt has now left the final decisions regarding new estate tax rules up in the air.
To complicate matters even further, the current estate tax law is scheduled to automatically be repealed as of December 31, 2010 and revert back to prior law. This means that if Congress does nothing, anyone dying with an estate exceeding $1 million could be subject to death tax rates as high as 55% on amounts above the $1 million limit. This would include millions of middle-class American families who own a home and have adequate life insurance.
Here’s what I believe will happen:
In November, Congress will extend the current estate tax exemption for one year. Meaning that for 2010, the estate tax exemption will remain $3.5 million. This will buy Congress time to focus on this issue, which will likely be one of the top campaign issues of the 2010 mid-term elections. Politicians running for re-election are likely to feel the pressure of cross-currents of voting for a law that helps the rich avoid taxes (i.e. making the $3.5 million exemption permanent) versus doing nothing and allowing the current law to 'sunset' on December 31, 2010, which will, in effect, cause millions of middle-class Americans to be subject to death taxes.
What you should do now:
Congress’ failure to take action makes it extremely difficult to properly plan your estate. Take a moment to estimate your Estate Net Worth: All of your assets plus all of your life insurance on both spouses minus all of your liabilities. If the net result is greater than $3.5 million, sit down with an estate attorney to review your estate plan.
If the net result is greater than $1 million, watch closely to see what Congress does next year regarding estate taxes. They’ll either do nothing and allow the amount you can pass on free of death taxes to revert back to $1 million or they’ll make a permanent change based on a higher limit. Plan your estate accordingly.
Let your voice be heard. Contact your congressional representative and demand that they address this issue quickly so that you can properly plan your estate for your family. Go to the Resource Center at www.welchgroup.com; click on ‘Links’; then Congressional Representatives Contact List.
Prior to the 2009 trillion dollar-plus deficit, both Democrats and Republicans had arrived at a consensus opinion that the estate tax exemption (the size estate you can own before you are subject to death taxes) should be set at $3.5 million dollars. The combination of distraction over passing healthcare reform and the almost incomprehensible rising national debt has now left the final decisions regarding new estate tax rules up in the air.
To complicate matters even further, the current estate tax law is scheduled to automatically be repealed as of December 31, 2010 and revert back to prior law. This means that if Congress does nothing, anyone dying with an estate exceeding $1 million could be subject to death tax rates as high as 55% on amounts above the $1 million limit. This would include millions of middle-class American families who own a home and have adequate life insurance.
Here’s what I believe will happen:
In November, Congress will extend the current estate tax exemption for one year. Meaning that for 2010, the estate tax exemption will remain $3.5 million. This will buy Congress time to focus on this issue, which will likely be one of the top campaign issues of the 2010 mid-term elections. Politicians running for re-election are likely to feel the pressure of cross-currents of voting for a law that helps the rich avoid taxes (i.e. making the $3.5 million exemption permanent) versus doing nothing and allowing the current law to 'sunset' on December 31, 2010, which will, in effect, cause millions of middle-class Americans to be subject to death taxes.
What you should do now:
Congress’ failure to take action makes it extremely difficult to properly plan your estate. Take a moment to estimate your Estate Net Worth: All of your assets plus all of your life insurance on both spouses minus all of your liabilities. If the net result is greater than $3.5 million, sit down with an estate attorney to review your estate plan.
If the net result is greater than $1 million, watch closely to see what Congress does next year regarding estate taxes. They’ll either do nothing and allow the amount you can pass on free of death taxes to revert back to $1 million or they’ll make a permanent change based on a higher limit. Plan your estate accordingly.
Let your voice be heard. Contact your congressional representative and demand that they address this issue quickly so that you can properly plan your estate for your family. Go to the Resource Center at www.welchgroup.com; click on ‘Links’; then Congressional Representatives Contact List.
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