Saturday, August 8, 2009

Estate and Gift Tax Update

What is Congress doing about the current situation whereby the Estate Tax will be repealed in 2010. President Obama has asked for legislation that would extend the current 2009 $3.5M exempt amount for another 3 years. But, so far nothing has happened. With the focus in Congress on health reform and cash for clunkers the "fixing" of the Estate Tax Code has seemed to have dropped off the radar screen.

Now this is my pure speculation. However, if the country becomes even more polarized over legislative agendas this Fall, I could see a scenario whereby the White House takes a pure party line approach. If no comprises are reached the Estate Tax will be repealed for one year in 2010. This means that if Warren Buffet died in 2010 his entire estate could pass estate tax free to his heirs. There would be no need for charitable planning from an estate tax avoidance point of view. I can actually picture people jumping off bridges on December 31, 2010 so that they can die to pass their estate to their heirs tax free. I can also picture junior who might wish to accelerate mom or dad's demise in 2010? One may wish to take a long cruise to stay away from anxious expectant heirs late in the year.

But, here is the kicker! Starting January 1, 2011 everyone who dies who has gross taxable estate in excess of $1,000,000 dollars would pay an estate tax of 55% on the excess over and above that amount. If you want to pick a on a constituency that does not vote, dead people fit the bill. And, if Congress is looking for an easy fix to ring in the tax dollars to pay for prior exorbitant spending, what better way than to say "we did not do anything. We just let the tax breaks expire." I hear a large sucking sound beginning to resonate in Washington, D.C. that will impact us all.

In light of all the uncertainty, the one thing that everyone who has an estate of over $1M should do is to update their estate plan to take all these scenarios into account. Many people will be lulled into a false sense of security thinking that this will not apply to them. What they do not realize is that the estate tax is like a giant sponge. It soaks up everything that one owns at death. This includes not only a person's so called "liquid assets" like cash, bank accounts, stocks, bonds, etc. but it also includes equity in real estate, all of an individual's retirement plans such as IRA's , 401(k) plans, annuities and the face amount of all life insurance owned by a decedent. When people add up all of this they are shocked to discover that on paper their estates are a lot larger than they think. The first dollar over $1M could be at risk of a possible 55% haircut.

Stay tuned as the script is not even been written on this yet!

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