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Estate Planning is
Dead! Long Live Estate Planning!
by Ginita Wall, CPA, CFP
 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Tax repealed |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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