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Estate Tax Laws & Alice in Wonderland

Estate taxes are collected by the IRS when an individual dies having too much money in his or her estate. It is a serious tax. It begins at 41% and can be as high as 49%.

Congress changed the estate tax rules in the Tax Relief Reconciliation Act of 2001 and increased the level of protection. It also created wonderment.

Commencing on January 1, 2002, the level of estate tax protection increased to $1 million. That is, a person dying in 2002 or 2003 will be able to pass along up to $1 million to family members without exposure to estate tax. Parenthetically, there is no change with regard to bequests to one's spouse. Known as the "marital deduction," there is no tax on any amount of money left to a surviving spouse.

In the year 2006, the level of individual protection increases to $2 million. If death occurs in the year 2009, $3.5 million may be passed along without estate tax exposure.

If death occurs in the year 2010, congratulations! The estate tax is repealed in the year 2010. No estate tax due on any amount.

But wait! The new law terminates on December 31, 2010. In the year 2011, all additional protections disappear and we are again at the $1 million level.

Because of this, we are convinced that Congress will revisit this law and make changes. In 2011, it will likely be politically unacceptable to roll back the level of protection to the relatively modest level of $1 million.

What will happen? It is anyone's guess.

We believe that the level of individual protection will be in the area of $2 million or $3 million. We do not believe that the estate tax elimination will become permanent law.

What should you do about your estate and tax planning? If you are a married couple and your estate is under $3 million, the "AB Trust" should be adequate, in that it will provide $1.5 million worth of protection for each of you.  If your estate is over $3 million, it is prudent to be conservative and to seriously consider tax-wise planning options that are available to you.

Our summary advice: If you are a married couple, your estate is under $3 million, and you are in reasonably good health, the AB Trust is adequate. You should be safe if you do not take additional planning steps. If your estate is over $3 million, you should seriously consider planning steps that can reduce or eliminate estate tax. Such steps include the family limited partnership (FLP), a tax-wise irrevocable trust into which you would transfer your residence for the benefit of your children, and a number of planning tools that might be appropriate in your situation. We can address these planning options with you.

If you are a single person and your estate is over $1.5 million, prudence suggests that you learn about other tax planning opportunities since the AB Trust is not available to you. The FLP as the cornerstone of an asset transfer plan may be ideal.

Finally, understand that a living trust may or may not provide a degree of protection from estate taxes.

  • For a single person it provides no estate tax protection whatsoever.
  • For a married couple it may or may not provide some protection.
  • If you have a large estate, additional planning is necessary.

Note: This article provides information, it does not constitute legal advice. 

Gilfix & La Poll Associates LLP attorneys practice elder law and estate planning and are available to answer any questions about Trusts, Durable Powers of Attorney for asset management, Advance Health Care Directives, and any other appropriate planning options.