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June 26, 2001: Are Death Taxes Really a Thing of the Past?

Q: We heard that "death taxes" have been eliminated. Can we change our tax Wills and go back to a two or three page simple Will?

A: The bill that was enacted does eventually eliminate taxes in the year 2010 but in the year 2011, estate taxes are reimposed with the exemption as it was in 2000 - $675,000.00 (this year for example the exemption is $700,000.00). During the next eight and a half years the exemptions are as follows: $1 million in 2002, increasing to $1.5 million in 2004, rising to $2 million in 2006, and finally reaching $3.5 million in 2009. These figures represent how much each person can pass on tax free in each of the periods.

The amounts seem large (at least to me) but remember the tax expose crashes from none in 2010 to almost 50% on amounts over $675,000.00 in 2011. Thus in general terms if both spouses die within the next eight and a half years, then no tax will be due. But if one survives to 2011 or beyond, then the survivor's estate can experience heavy losses. Therefore the classic estate planning technique of not piling up all the taxable estates in the survivor's taxable estate but to hold part in a tax trust either through a Will or through a living trust continues to be necessary.

But even if there is no estate tax due because of the new tax law, a capital gain tax will be imposed on appreciated assets (the difference between the value of the asset at date of death and the cost basis of the asset normally what was paid for it. This is a "new" tax, since under the old law the assets are exposed to estate taxes. Then for income tax purposes, there was a stepped up basis from what was paid up to the value at the date of death. It was not considered fair to expose assets to the two taxes. Thus since estate taxes have been taken away, the government feels it is fair to tax the assets anyway, at least the appreciation. In 2010 it probably will not be unusual for a family to pay "tax" at death which is much higher than the current estate tax exposure.

So keep your current documents unless you can be certain that both of you will die within the next 8 years or the survivor will not have more than $675,000.00 (including insurance and retirement proceeds). Also if it is possible that one of you may have died within the next 8 years, then in 2010 the survivor would have more than $675,000.00 of taxable assets, tax wills should be considered now.

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