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Changes in the Federal Estate Tax Laws and the affect it could have on you

Posted On 1/7/2010

Changes in the Federal Estate Tax Laws and the affect it could have on you
By: Stephen C. Hartnett, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys

 

The mere word “change” causes many of us to become immobilized. As we anticipate (tick, tick, tick) the final word on how the federal estate tax laws will be changing, it is easy to get distracted and overwhelmed with the waiting. Let’s take a look at the current estate planning circumstances and consider what the proposed changes could have on you.

Current Tax Law Situation
Back in George W. Bush’s first months in office, Congress passed “the Economic Growth and Tax Relief Reconciliation Act of 2001,” or “EGTRRA.” Among other things, that law made significant changes to the federal estate tax system. It gradually increased the amount that Americans could pass exempt from federal estate tax from $1 million in 2002, to $2 million in 2008, and to $3.5 million in 2009. EGTRRA provides that in 2010 the federal estate tax is repealed for one year. What this means is those that pass away in 2010 will not have to pay any federal estate taxes. However, due to budgetary constraints, Congress had the law “sunset” or go away at the end of 2010. Thus, in 2011 and thereafter the federal estate tax returns with a $1 million applicable exclusion.

Many expect Congress to act to prevent the repeal of the federal estate tax. In fact, on December 3rd, the House voted to make both the federal estate tax and 2009’s $3.5 million exclusion permanent. However, the close House vote indicates that passage is not assured in the Senate, which requires 60% approval to avoid a filibuster.

There are several other measures currently before Congress which would prevent the repeal of the federal estate tax. These bills would set the exclusion amount permanently between $2 million and $5 million per person. Others expect that Congress will not be able to agree on a permanent solution but will do a one-year extension of the current $3.5 million exclusion to prevent the repeal in 2010. If Congress does a one-year extension, then the exclusion will drop to $1 million in 2011, unless Congress acts again before then.

We’ll know by year-end, right?
Not much is certain. Even if Congress fails to act before the end of 2009, it can still change the law and have the change apply retroactively to Jan. 1st (at least if it acts within 9 months). As a result, we may not know if there is a federal estate tax until well into 2010!

So, how do we plan in the midst of this uncertainty?

• First, do an estate plan. It has often been said that if you fail to plan, you might just as well plan to fail. Remember to keep your plan updated. A qualified estate planning attorney will keep you informed of changes in the law that would affect your estate plan.
• Second, it’s not just about the taxes! Federal estate taxes currently affect less than one percent of people. The most important reasons to plan are captured in the photos displayed around your home: your family.
• Third, don’t procrastinate. Estate tax uncertainty is not a good excuse for not creating your estate plan. Without a current estate plan, you are jeopardizing the futures of those most important to you. Do you really want confusion and turmoil to be your legacy? How would your assets be managed? Who would care for minor children?
• Fourth, a Trust-based estate plan is a way to protect your privacy, during your life as well as when you’re gone.
• Fifth, a good estate plan not only protects those around you after your death, it protects you and your family in the event of your incapacity.

The bottom line is impending change in the federal estate tax is not an excuse to procrastinate on something as important as creating an estate plan. The impact of no planning will be far more devastating to your family and loved ones than change in the federal estate tax. A qualified estate planning attorney can help you create a comprehensive estate plan and will keep you informed of any changes in the law that would impact your situation.

TOP ESTATE PLANNING TECHNIQUES

 

Revocable Living Trust:
A device used to avoid probate and provide management of your property, during life and after death.

Property Power of Attorney:
Instrument used to allow an agent you name to manage your property if you become incapacitated.

Health Care Power of Attorney:
Instrument used to allow a person you name to make health care decisions for you should you become incapacitated.

Irrevocable Life Insurance Trust:
A trust used to prevent estate taxes on insurance proceeds received at the death of an insured.

Children’s or Grandchildren’s Irrevocable Education Trust:
A trust used by parents and grandparents for a child’s or grandchild’s education.

$13,000 Annual Gift Tax Exclusion:
Technique to allow gifts without the imposition of estate or gift taxes.

Fractional Interest Gift:
Allows a donor to transfer partial interests in real property to donees and obtain fractional interest discounts for estate and gift tax purposes.

Distributed by SINCLAIRPROSSER LAW, LLC
Attorneys Colleen Sinclair Prosser, Nicole Livingston and Patricia Jaron
Offices in Annapolis, Millersville, Bowie and Waldorf
For more information or to register for a free estate planning seminar visit
www.sinclairprosserlaw.com

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