What No More Estate Taxes?

We spend time and effort creating plans to find legal ways to avoid paying taxes.

We all pay taxes everyday… from property tax, to sales tax, to gasoline tax, to Mello Roos  (a nice little tax on newer homes here in Carmel Valley to fund new schools)… Taxes are everywhere.

So, when a tax is set to disappear… people take notice.

The Federal Estate Tax is scheduled to disappear next year.  However, according to the Wall Street Journal, “Washington insiders are betting lawmakers won’t let that happen.”  Currently, an individual can pass on $3.5 million at death without paying any tax (the amount has gradually been increasing since the law was passed in 2000).  After going to zero in 2010, the exemption is set to go back down to $1 million in 2011.  So, basically, right now there’s a moving target on the estate tax exemption.

The WSJ article makes the point that it doesn’t benefit anyone for the Estate Tax to disappear altogether because, as written, the Estate Tax disappears along with the provision allowing a step-up in cost basis for property passed on.  What this means in practical terms is that the value for tax purposes of property passed on at someone’s death is the value at the date of death — rather than at the date of purchase.  For example, let’s say your dad bought a house for $100,000 in 1970 and when he died in 2005, the house was worth $600,000 (notice I chose 2005 before the great decline?).   If the beneficiary later sold the house in 2006 for $610,000 he or she would only pay a capital gains tax on $10,000.  Much better than paying capital gains tax on $510,000 if the cost basis was the original date of purchase.  Agreed?  Of course.

The WSJ article also highlighted some other Estate Tax Avoidance Planning Tools that may disappear:

Other techniques long used to trim estate taxes may be scaled back or prohibited, however. They include family limited partnerships; grantor retained annuity trusts (GRATs); and qualified personal residence trusts (QPRTs). All use a variety of legal means to freeze or undervalue assets that are being transferred out of the owner’s estate.

Read the article yourself.  Here are some conclusions that I draw from the information:

1.  The Estate Tax is a moving target.  Don’t count on it disappearing in 2010 — but even if it does, the step-up in basis disappears so you have other problems…

2.  Estate Tax Laws Will Likely Always Change… Thus, if you planned your estate in 2000, after the above tax relief act was enacted, and “set it” to “forget it” on the shelf… your loved ones could be in trouble.  That’s why it is really important to work with a lawyer who as a matter of course is going to regularly review your plan — to make sure that it will always work.  Of course, there are many goals of creating wills, trusts, and estate plans… besides just legally avoiding taxes… but most people I know who have spent a lifetime working hard, making sacrifices in order to build up a nice nest egg want to see their children, and eventually their grandchildren, get as much of their hard-earned wealth tax free as possible!  Without proper planning, the potential taxes could be staggering.  We all pay taxes, but if you can avoid giving Uncle Sam half of your assets when you die… most people will take steps to do so.

3.  If you are a business owner, a physician, surgeon, or other individual with significant assets, now may be the time to set up some of the advanced planning options before they disappear.

Work hard, play hard, enjoy life, create a legacy — and take the time to find a trusted advisor on these legal issues.  A lawyer that stays up-to-date on these legal tax issues and who is dedicated to working with you over time to make sure regardless of what Congress does, you will be in a position to pass on your wealth to whom you want, when you want, with as little going to Uncle Sam as possible.

Leave Your Legacy,

Kristina Hess

p.s.  If you live in the San Diego area, I am here to help.

p.p.s. Disclaimer: I’m not your lawyer (unless we have entered into a written agreement) and I’m not providing legal advice.  This blog is for general informational purposes only.