Avoiding an estate of confusion

Ever-changing estate tax laws make it tough to plan for future

Knight Ridder Newspapers

What do you call something that exists one moment, disappears the next, then reappears ... unless it doesn't?

It's not a subatomic particle. It's the estate tax.

When last many looked at it, after President Bush's tax-cut plan became law in June 2001, the estate tax was set to wither away, sort of. Last year, it applied to portions of an estate over $675,000, and the maximum tax rate was 55 percent. This year, those figures are $1 million and 50 percent.


By 2009, the tax is to apply only to the portions of estates over $3.5 million, and the top rate will be 45 percent. In 2010, the tax will disappear altogether.

Then, in 2011, this vampire will come back, affecting estates worth $1 million and more at a rate of 55 percent.

Republicans, and some Democrats, have not been happy with the sunset provision that reverses last year's tax cuts in 2011. So last week, the Republican-controlled House passed a measure that would make the final repeal permanent after it kicks in eight years from now. Democrats who control the Senate, which may vote by the end of the month, don't like the bill.

So the estate-tax limbo continues.

In the past, only about 2 percent of people who died left estates large enough to trigger estate tax. But that's likely to change. When investments, houses, inheritances and life insurance policies are totaled, lots of today's 40-, 50- and 60-somethings will leave seven-figure estates, even though they'd consider themselves middle-class folks. Ten years from now, $1 million will be worth only $750,000 in today's dollars, assuming inflation of around 3 percent.

With so much uncertainty, what should you do if you expect to leave an estate that's potentially taxable -- exceeding $1 million, for instance?

It probably makes sense to consult a professional, such as a tax attorney or financial advisor familiar with estate issues.

In fact, there may be good reason to do this even if you figure the tax thresholds will rise enough to spare your estate. Estate planning can assure your money is used the way you want it to be -- that it's divided right among children, grandchildren and charities, for instance. Planning is especially important for people in complex situations, such as couples with children from previous marriages.


There's no tax on an estate that passes from one spouse to the other. But when the second spouse dies, the tax will apply if the threshold on the combined assets is exceeded.

To avoid that, each spouse can leave his or her estate to a trust set up to benefit the surviving spouse after the other dies. The survivor would receive income from the trust, and even some principal. But the trust would not be part of the survivor's estate.

When the survivor dies, the trust would pass free of estate tax to the children or other beneficiaries named by the first spouse. With this technique, a married couple can double the estate-tax exemption -- sheltering $2 million under this year's rules, instead of just $1 million.

Today, many people hedge against the possibility of future estate tax bills by taking out life insurance policies with benefits large enough to pay the tax, said financial advisor Steven Leshner, principal of Commonwealth Consulting Group in Jenkintown, Pa.

Leshner, past president of the Philadelphia Estate Planning Council, favors relatively inexpensive "survivorship" or "second-to-die" policies, which cover each spouse but pay off only after both spouses have died. If there is no estate tax at that point, the insurance benefit would simply increase your heir's inheritance, Leshner said.

Giving away money and other assets is the other major technique for reducing taxable estates. Each of us can give $11,000 a year to each of an unlimited number of people without triggering any form of tax for giver or recipient. That means a couple with two married children and four grandchildren could give away $176,000 a year and still keep the money in the family.

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