Estate Taxes Can Bite You Bad after the Year of Kevorkian
By Shane Flait © 2008

The estate tax is the government’s last bite out of you when you die. It’s a tax on the value of your estate at your death. And it can be a big bite.

Your estate is anything you own and in which you had an interest at the time of death. It may also include the value of certain property you transferred within 3 years before your death.

A graduated estate tax is imposed on the value of your estate in excess of whatever this year’s estate tax exclusion level. The tax rate starts at 20% and goes up fast! Paying estate tax can destroy the nature of what you own –such as a business – if you don’t have the available cash to pay it.

The 2001 Tax Act[1] broke apart the unified estate and gift tax scheme and left us with a confusing and unpredictable estate tax arrangement that undermines long term planning. The law produced a graduated increase in the estate tax exclusion levels and a reduction in the maximum estate tax rates. In fact the estate tax was repealed for the year 2010 when no estate tax would exist – a year often referred to as the ‘Year of Kevorkian’. 

The table shows how much of your estate is excluded from estate tax for the coming years along with the highest rate of the estate tax.

 

Year	Highest Estate Tax Rate	Estate Tax Exclusion Level
2007-8	45%	$2 million
2009	45%	$3.5 million
2010	No  Estate Tax	No Estate Tax
2011	Return to pre-2001 Tax Act (55%)	Return to pre-2001 Tax Act ($1 million)

 

The increasing estate tax exclusion levels through 2010 keep a lot of Americans free from estate tax without much planning. But if you have or control a lot of wealth or a business of substantial value, you may want to take steps to either forego ownership to reduce your estate or buy life insurance to handle estate taxes.

Even though the pre-2001 estate tax is slated to go into effect in 2011, it’s not clear whether congress will alter this. It’s a disgrace that congress can’t get the act together so people can plan the estate at least 10 years in advance.

Although the estate tax was designed to grab some wealth from the very wealthy, it’ll be digging into the wealth transfer of the ‘average Joe or Jane’ come 2011. That’s because it won’t be hard to push beyond the $1 million exclusion level then. Many estates will surpass it as house values alone – these days - can eat up half to all of it. 

If you’re married and die before your spouse, you can leave all your wealth to her without paying estate tax by using the ‘unlimited’ marital deduction from your gross estate. Unfortunately, that’ll leave her estate that much bigger by the time she’s dies. And then the wealth will be taxed before going to your kids. You also miss using the estate tax exclusion level as it applies to your death.

 

Take advantage of your estate tax exclusion level by arranging to transfer at least that exclusion level amount to a trust with your kids as eventual beneficiaries. Then give the rest going to your spouse. You can even let the trust help her out if she needs money in those intervening years before here death.

 

Learn about this and other strategies to safeguard your wealth for you and yours.

 

 Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com