The estate tax isn’t going away, but new laws may make it better
It’s time for a wake-up call for anyone who has been using the uncertainty surrounding the federal estate tax as an excuse to avoid estate planning. Stop kidding yourself. The chances for a repeal of the estate tax are now similar to the prospect of a snowball’s survival in Hades. Ironic as it may seem amid all the uncertainties of this election year, the future of the estate tax is more certain now than it has been in years.
A quick refresher course: Back in 2001, Congress passed a law to gradually phase out the tax. The amount Americans can pass to their heirs tax-free was set to rise from $675,000 in 2001 to $3.5 million by $2009. (It’s $2 million this year.) Then, in 2010, the estate tax was supposed to expire. But the tax was also scheduled to rise from the dead in 2011 with a paltry $1 million exemption.
While the schedule is still in place, it’s clearer than ever that it will not be followed. Why not? Because it’s most likely the next occupant of the White House will be against it. Both John McCain and Barack Obama have made it very clear that they oppose even a one-year moratorium on the estate tax.
Obama is happy to let the $3.5 million exemption amount planned for 2009 continue into the future; McCain would prefer a $10 million exemption. Since the law allows married couples who do a little planning to double the tax-free amount, it’s likely that in the future couples will be able to leave their heirs a minimum of $7 million — and maybe as much as $20 million — before Uncle Sam gets a bite of the assets.
What about a wonderful one-year hiatus — an estate-tax-free 2010?
“It ain’t going to happen,” says William Kirchick, an estate tax lawyer with Bingham McCutchen in Boston. “It’s not a reality and it was never intended to be.” By the end of next year, Kirchick expects Congress to OK a tax-free amount for 2010 of at least $3.5 million, perhaps up to $5 million.
With McCain or Obama in the White House, that is a good bet. A more contentious issue going forward most likely will be the top estate tax rate. Now 45 percent, some observers see the rate falling to 35 percent or even lower. Others believe it may be pushed back up to the 55 percent rate in effect before the 2001 tax changes. Count on Congress hammering out the details in 2009.
Few Need Fear the Estate Tax
The higher exemption amounts mean that fewer Americans than ever will need to worry about the estate tax. Back in 2006, fewer than 3,000 estates actually owed the tax. With a $3.5 million exemption next year, and a similar or larger exemption likely in the future, even fewer estates will be threatened.
But that does not mean fewer people need to worry about estate planning.
No matter what your net worth, it’s important to establish an estate plan, which starts with writing a will and may also include a medical directive, a health care proxy, a living will, and trusts. Estate tax planning has always been just part of the picture. If you are among the tiny minority who face a potential estate tax bill, planning can be incredibly valuable. That will be true going forward, no matter what tax rates apply.
Kevin McCormally is the editorial director of Kiplinger’s Personal Finance magazine. Visit kiplinger.com
