Estate Planning is Dead! Long Live Estate Planning!

In the wake of the excitement from the “biggest tax reduction in 20 years”, we taxpayers are left with the daunting task of figuring out exactly what was reduced.

Take the estate tax “repeal” promised by President Bush—please. From all of the hype, you might think that the estate tax is being slowly phased out over the next 10 years, to result in complete freedom by 2010.

Nothing could be further from the truth. The estate tax is alive and well. To help you understand how this shell game was played by Congress and the President, let me explain how the estate tax works.

The United States has two major systems of taxation: the income tax and the gift and estate tax. The income tax covers money exchanged for value. The gift and estate tax covers money given out of the goodness of your heart, during your life or after your death. The two tax systems are almost totally independent, involving different forms, rates, and regulations.

Each taxpayer is given a unified estate and gift tax credit, which shelters a certain amount of money from gift and estate tax, presently $675,000. This is the amount of money you can give to other people over your lifetime (over a $10,000 per person per year limit) without paying gift tax. Every dollar of this exemption that you give to other people during your lifetime decreases the amount sheltered from estate tax when you die. The rest is taxed at exorbitant rates, reaching a maximum of 55%.

The new tax law has not changed any of this by one comma. It has merely increased the exemption and reduced the rates by a token amount, while delaying the promised repeal for almost 10 years. Worse yet, if this planned repeal actually does take effect, it will automatically expire at the end of 2010. So you’d better plan to die in the year 2010 to avoid tax.

Calendar year

Estate tax exemption at death Lifetime gift tax exemption Highest estate and gift tax rate
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 Tax repealed $1 million Gift tax rate = income tax rate

The good news is that a very small percentage of taxpayers actually have to pay estate tax, and if you are a member of that select group, there are many ways you can legally avoid paying the tax. If you own a home, business, or other assets that will put your estate over the limitation, talk to your financial advisor or attorney about A-B trusts, charitable remainder trusts, and other forms of estate planning. If you already have an estate plan in place, the new law should not require any changes.

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