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Coping With Estate Tax Uncertainties


It has been said that the two things you can count on are death and taxes. But what about the tax that may come due upon your death? Under current law, the federal estate tax is being whittled down until it expires in 2010. But unless Congress acts, the tax will return with a vengeance just one year later. And although this political football has been kicked around in our nation’s capital for most of this decade, there is no clear-cut outcome in sight. That leaves those whose assets might be subject to the tax in estate planning limbo.

The most practical approach for now is to know the existing law and prepare for pending changes as if they will definitely occur. The massive Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) completely revamped federal estate tax law, and under EGTRRA, these changes are being implemented:

  • The individual estate tax exemption, which shelters an estate from tax liability through a special tax credit, is gradually increasing from $675,000 for those who died in 2001 to $3.5 million for anyone who dies in 2009. In 2008, the exemption is $2 million.
  • The top federal estate tax rate of 55% has been gradually decreasing during the same time period. It is 45% in 2008 and will remain there until the estate tax is repealed.
  • The individual exemption from gift taxes stopped rising in 2004 and will remain at $1 million. So the estate and gift tax credits, once identical—and sometimes referred to as the “unified” credit—are unified no more. But the gift tax rate has continued to fall with the estate tax rate and is currently also at 45%. After 2009, the gift tax rate will be pegged to the top individual income tax rate (currently 35%).
  • The generation-skipping transfer tax (GSTT), which generally applies to transfers of property to grandchildren, will also be repealed after 2009 and revived in 2011. The GST exemption is $2 million in 2008 and $3.5 million in 2009.
  • After 2009, heirs will no longer benefit from a “step-up” in cost basis on inherited assets. Suppose you own 10,000 shares of stock that you purchased years ago for $10 a share but that is worth $100 a share at the time of your death. Under current rules, your heirs could “step up” the per-share basis to $100, potentially avoiding capital gains tax on $900,000. Under the new rules, heirs will inherit the deceased owner’s basis, though non-spouse inheritors will be able to increase the basis by $1.3 million, and spouses can take advantage of an additional $3 million bump, for a total of $4.3 million.

Most provisions of EGTRRA will “sunset” after 2010, with exemption amounts and tax rates essentially reverting to pre-EGTRRA levels. So an estate plan that assumes there will be a $3.5 million exemption, for example, may be of little use if the exemption is actually only $1 million when you die. While Congress doesn't favor lowering exemptions, this could change with a new president. We can work with you and your estate attorney to develop a plan that is flexible enough to adapt to the law as it changes.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.   

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