Q: Now that the Bush tax cuts are in place, as an estate planning attorney, are you going to take early retirement from practicing law and maybe do something else like syndicate this column?
A: To mix metaphors just a bit, the "death taxes" are like bad pennies – you can try to get rid of them but they seem to keep coming back, like a phoenix rising up from the ashes of the funeral fires set ablaze to destroy them.
The current estate tax exemption is $700,000.00 (one person can pass on that total amount tax free from both federal and state estate taxes). Under the current law that amount will remain at that level next year and then increase to $850,000.00 in 2003.
Under the new law, the exemption will rise to $1,000,000.00 in 2002 and then increase to $1,500,000.00 in 2004, $2,000,000.00 in 2006, and $3,500,000.00 in 2009. Then in the year 2010, "death taxes" will be eliminated.
But folks, what happens in the year 2011? Death taxes are born again, bouncing back to the 2000 level with all of their present impact fully intact. As Paul Krugman of the New York Times recently pointed out, a person could die in 2010 and his or her estate would pass tax free. But if that same person died in 2011, up to half of the estate assets above the exemption ($675,000.00 in 2011) could be lost to both federal and state estate taxes.
For a couple, estate planning in a nutshell is preventing taxes at the second death, since there are usually no tax consequences at the first death because a "second exemption" (besides the $700,000.00 one) permits any amount to go tax free to a surviving spouse. Thus, to prevent assets from being piled up in the second spouse's taxable estate and thus push the combined asset total above the exemption, assets at the first death are diverted away from the second spouse's taxable estate but are held so the couple's assets can be used by the second spouse if needed but will not be taxed at the second death. If this is not done at the first death, then it can not be done later.
Thus in planning, normally the assumption probably will be made that one of the two will be alive eight and a half years from now when the exemption will be back to $675,000.00. So tax planning will still need to be done, even if there would be no tax due if both died within the next eight and a half years.
I have visited with some of my friends who are "big dog" lawyers in prime time legal venues. Each says not only will he or she not advise anyone to exit their current estate documents, but each expressed an ethical duty to go back and insist that if a potential widow or widower "could" have more than $675,000.00 in 2011, tax wills and related documents must be done right away.
So what is the bottom line? If avoiding "death taxes" is the dominant goal in your life and you refuse to spend the full hundred dollars to just get your tax wills done, then timing (as the old saying goes) is everything. The rest is up to you.