Just because the Estate Tax has been phased out in 2010, don't be lulled into thinking it won't be back with a vengeance. On the books, it's slated to return with only a $1 million exemption. Efforts to get rid of it altogether have failed. The government will be looking for more money anyway now anyway. The following give you the full picture and how to prepare for it.
The estate tax is the government's last bite out of you when you die. It's a tax on the value of your estate at your death. And your estate is anything you own and in which you had an interest at the time of death. It can also include the value of certain property you transferred within 3 years before your death.
This graduated tax is imposed on the value of your estate in excess of whatever this year's estate exclusion level - if you die this year. And the tax rates here starts at 20% and rise fast to 45% or higher!
If you're leaving an on-going business as part of your estate and have no cash to pay the estate tax, the business can be dismantled to pay it. This is true for almost anything you own. The 2001 Tax Act1 broke apart the unified estate and gift tax scheme and left us with a confusing and unpredictable estate tax arrangement that undermines long term planning. The estate tax has been in the process of being phased out since then. Each year, rates have been lowered or estate tax exclusion levels have risen.
For 2009, the highest estate tax rate is 45% with a $3.5 million exclusion level. And in 2010 no estate tax exists. Originally, it was hoped that that would continue indefinitely. But that just isn't going to happen.
The increasing estate tax exclusion levels through 2010 will keep a lot of Americans free from estate tax without much planning. But if you have or control a lot of wealth or a business of substantial value, you may want to take steps to either forego ownership to reduce your estate or buy life insurance to handle estate taxes.
Even though the pre-2001 estate tax is slated to go into effect in 2011, it's not clear whether congress will alter this. Those who die in 2011 are slated to pay have only a $1 million estate tax exclusion level and up to a 55% estate tax rate imposed on them.
Most in congress favour keeping the Estate Tax but they're arguing over how high the exemption level should be. With 2011 less than 2 years away, congress just can't get its act together.
Originally, the estate tax was aimed only at the very wealthy and not the average citizen. But it'll be hitting the average citizen in 2011. That's because it won't be hard for the average citizen's holding to go beyond the $1 million exclusion level. Many estates will surpass it by virtue of house values alone having risen so high over the last 10 years.
Of course, if you're married and die before your spouse, you can leave all your wealth to her without paying estate tax by using the 'unlimited' marital deduction from your gross estate. But, unfortunately, that'll leave her estate that much bigger by the time she's dies. And then the wealth will be taxed before going to your kids.
You should surely use your own estate tax exclusion level to shelter some of the wealth you have when you die. You can do so by arranging to transfer at least that exclusion level amount to a trust with your kids as eventual beneficiaries. Beyond that, you can give the rest to your spouse. That 'estate tax exclusion level' trust' can still help your surviving spouse with money needs before she dies.
So be prepared for the coming Estate Tax in 2011.
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