Q: I know you have touched on this subject before, but after the tax reform act, do we really have to worry about estate taxes?
A: In this day and age, it is not that unusual for an individual or a couple for estate tax purposes to have a net worth of $675,000. Why a couple? Because usually if one dies, everything is left to the survivor without any tax exposure at the first death.
But at the second death, property can only be passed on tax-free if the value of the taxable estate is below the tax exemption for the year of death. This year that amount is $1,000,000. Two years from now the amount will be $1,500,000. By 2010 there will be no tax. But in 2011 the exemption will fall back to $675,00 (although some hold that the fall back amount will be $1,000,000).
Before the recent tax law change, estate planners normally would look at the existing tax exposure and if a couple's current net worth exceeded the exemption, then tax documents would be done. If the estate was nontaxable, then tax documents would be deferred and other documents put in place. Later if the net worth exceeded the exemption, then the tax planning would be done.
Now if it is possible that a person would be alive in 2011 with a taxable net worth above $675,000 at that time, documents should be considered and put into place now, even if there is currently no tax exposure.
Thus, people presently with tax documents are keeping them, even though at some point in the next eight years their estate could pass on tax-free if both died. And people who do not currently have estate tax problems, but may by 2011, are putting such documents in place in case one person would die before 2011.
Sounds complicated? Yes, unfortunately. But thanks to our politicians who wanted to put death taxes to death, we have been thrust into very uncertain times. In truth, with very simple and relatively inexpensive competent estate planning, no one had to fear estate or inheritance taxes. Now the tax laws have forced many more people to consider doing the very planning that they were trying to avoid.
Today, with a very expensive war going on in Afghanistan, the federal and state governments running a deficit, twenty billion dollars promised to New York City alone, do you think that Congress will "finish the job" and accomplish their goal of "death to death taxes?" Or is it more likely that the government will try to find revenue sources?