“The amount of each estate that is exempt from estate tax is scheduled to become $1 million in 2011 (down from $3.5 million in 2009, when the tax was last in effect). The tax on the balance is to rise to 55 percent in most cases (up from the 2009 rate of 45 percent). So now is the time to consider the various tax strategies available.”

What this lower exemption rate really means, however, is that more families will be caught off-guard when a loved one passes away and the survivors are suddenly hit with a massive tax bill.

That is unless families start planning now.

The Times article mentioned above suggests that “the easiest way to reduce the tax bill is to give as much as $13,000 a year each to as many people as you like — which you can do without paying gift tax;” but when you consider how little $1 million really is (especially when the value of your home, retirement savings, etc. are all included when adding up your total assets) we’re guessing that there are a lot of people out there who are over the exemption amount, but don’t feel they can afford to go handing out $13,000 every year. Much more appealing are some of the other planning strategies suggested in the article, including:

• “Buy a one- or two-year [life insurance] term policy to cover the tax bill if the exemption amount is only $1 million.” If you  want to cover the risk that you might die during the next year or so during a time where the estate tax exemption could be low relative to the value of your estate, the policy will help your heirs cover what could be a hefty tax bill.  If Congress later increases the exemption so that you no longer need this protection for the excess, the policy could then be canceled;
• “Create a trust.” The article suggests a GRAT (Grantor Retained Annuity Trust), which is a great tool for assets with depressed values that are expected to appreciate during your lifetime; but for married couples simply looking for a way to protect their children from a hefty federal estate tax down the road a Credit Shelter Trust may be a better option.

There are a number of other ways you might be able to prepare for the coming estate tax upheaval—the best way to protect your own family is to contact an estate planning attorney and ask about your options.



According to the New York Times even hale and hearty individuals can save on their taxes in 2010—it just takes a little more planning. “A bigger issue [than the estate tax]… has become the gift tax, which is linked to the estate tax to prevent people from giving away their fortune in life to avoid taxes at death. It now stands at 35 percent, the lowest rate since the 1930s.” The gift tax is a tax on money or property that you give to another individual while you are still living. Currently an individual may give up to $13,000 per year per recipient (or up to $26,000 if you give as a married couple) without incurring gift tax.

If you’re a wealthy parent or grandparent trying to decrease your taxable estate through gift-giving, this is the year to do it for a number of reasons. First, of course, is the historically low 35% gift tax rate. Second, “in addition to the historically low rate, another reason to make sizable gifts this year is that the values of many assets are still depressed. Long-held stocks, real estate and shares in private businesses could all increase in value, and giving them away now will allow them to appreciate with your heirs and not in your estate.” A final reason to consider giving your large gifts before the year is over is that the 35% rate won’t last forever; the gift tax is expected to rise to 55% next year.

How can you take advantage of this lucky confluence of events? Well, as always when you’re dealing with large sums of money (not to mention dealing with the IRS), you’ll want to be careful. We do NOT recommend that you simply write a check for $13,000+. Contact your estate planner or your financial planner to find out how you can safely reduce your taxable estate while giving security to the people you love. A very important caution however:  if you believe you may need long term care in the near future, gifting away assets now could make you ineligible for a government long term care subsidy under the Medi-Cal program. Talk to your Elder Law attorney about this before you make the gifts.

Unfortunately, according to both news sources, politics takes precedence over legislation. “The tax fight will serve as a proxy for the bigger political clashes of the year, including the size of government and the best way of handling the tepid economic recovery,” warns David M. Herszenhorn of the NY Times, “’…this is code for the role of the federal government, the debate over the size of government and the priorities of the nation.’”

According to David Wessel of the WSJ party lines are clearly drawn. “The Obama administration is pressing to extend the Bush tax cuts for everyone with an income under $250,000 a year and to raise taxes on those above. A recent Pew/National Journal poll found that only 11% of Democrats favor extending all the Bush tax cuts.” Meanwhile, “Republicans are happily staking out the no-new-taxes turf, playing to their traditional constituency. Pew says 52% of Republicans favor extending all the Bush tax cuts.”

It would certainly give taxpayers some comfort if legislation could be passed quickly and decisively, but Herszenhorn warns that it’s not likely to happen, “Given the partisan gridlock of recent months, there is a chance that the battle could go down to the last minute, or even — in the face of a stalemate — that the tax cuts could be allowed to expire completely, a development that… lawmakers in both parties say could be the worst outcome.”

Either way, the best advice we can give our readers is to be prepared. Just because lawmakers keep putting off a decision doesn’t mean you should. Talk to your attorney about the best way for your family to weather the coming storm. Be aware of changes to tax laws and update your estate plan accordingly.

Attorney and accountant Bob Carlson has written an article in InvestingDaily.com in which he enumerates four reasons to create an estate plan even without the motivating factor of estate taxes (he calls this Legacy Planning):

1. Financial Security
2. Continuing management and caretaking
3. Protection (from creditors, predators and lawsuits, if not from taxes)
4. Other tax burdens (such as state taxes, capital gains taxes, gift taxes, etc.)

There are many things we do in our lives not because we have to, but because we know it’s the right thing to do. Estate planning is no different. Creating an estate plan is not just about taxes, it’s about you and your family planning for the future. Creating an estate plan is about being there for your children even after you’ve passed away; it’s about protecting them, providing for them, and even teaching them fiscal responsibility.

Will the lack of estate taxes in 2010 lead you to ignore these other important reasons to protect your family and plan for the future?

According to the Associated Press Steinbrenner’s family is set to receive a tax break of “about $328 million” because of the estate tax repeal this year. This number, along with the millions of dollars saved (that would otherwise have gone to pay estate taxes) by the families of Dan L. Duncan, Walter Shorenstein, and Mary Janet Morse Cargill may inspire Congress to take action on the issue of the estate tax before the year is over. The Washington Post quotes Senator Bernard Sanders of R.I. as saying, “In the midst of this terrible recession, the idea of giving billionaires a massive tax break is obscene… Already we have four billionaire families who are not paying taxes — Steinbrenner’s being the last one. Many billions are being lost. We have to address that reality right now.”

Although there is still some talk of the possibility of the estate tax being reinstated retroactively, most lawmakers and attorneys agree that the further into 2010 we get the less likely this becomes. But missing out on the estate taxes of four billionaires has to hurt, and the members of Congress are not likely to drag their feet much longer. One way or another, we can soon expect to see the issue of the estate tax become a hot topic of debate in Washington. Our firm will keep you abreast of any changes to the law that could affect you, your loved ones, or your estate.

“Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher… Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.”

According to the NY Times article this news is meeting with mixed reactions. Opponents of the estate tax (sometimes called the death tax) are hoping to make the repeal permanent. Others, however, don’t agree:

“’The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,’ said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffett and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a ‘recycling program for economic opportunity.’”

Whatever happens in future years, considering that this year is already half over,  it can only be hoped that heirs and executors won’t have to worry about the tax being reinstated for persons dying in 2010, although Congress could still reinstate it retroactively;  this leaves us free to look ahead and plan for 2011 when the estate tax is now set to return at a whopping 55%.  If you’re wondering how all these changes will impact your estate planning,  we may be able to help with some answers and with some techniques to “hedge” against the return of the estate tax.

Well, we’re 4 months into 2010 and there is still no retroactive estate tax—but there is also still no rejoicing. This is because the lack of estate tax has actually created more problems than it has solved for the wealthy and affluent. According to this article in Financial Advisor Magazine the recent deaths of Texas billionaire Dan Duncan and Taco Bell founder Glen W. Bell, Jr. have only made it clear to tax attorneys that “lawsuits of various kinds will blossom in the estate-tax vacuum. The more money left on the table when the wealthy die, the more likely heirs are to fight for years over who should inherit.”

And you don’t have to be a billionaire to feel the consequences of the lack of tax. This article in Bloomberg Businessweek explains that those who think they’re catching a break on the estate tax could instead “…wind up paying stiff capital-gains taxes on inheritances. That’s because of the disappearance of what’s known as the “step-up” in basis, which allowed assets to be revalued for tax purposes at the time of death.”

But even this is preferable to finding yourself unintentionally disinherited by standard estate tax clauses included in older wills and trusts, a scenario that is more likely to happen than you may think if your spouse or parent hasn’t had their estate plan reviewed yet this year. For more on this see Attorney Gene Osofsky’s article, “Estate Tax Repeal Creates Planning Dilemmas:  Some Spouses May Now Be Left ‘Out In The Cold’”.

What is the bottom line? Every silver lining has a dark cloud, and you want to take every precaution possible to keep your heirs safe from the storm during this “gap year” in the estate tax.

To this end, we have found that CBS’s Money Watch.com has published a very useful article about what the lack of estate tax in 2010 could mean for you and your family. The entire article is educational, but if you scroll about 1/3 of the way down the page you get to the crux of the article, a section titled “Steps to Take Now.” This section provides you with practical advice on what you can do, and what in your estate plan may need to change in order to keep up with the changing times and taxes:

• Keep good records
• Have an attorney review the “formula clauses” in your estate plan
• Be aware of the tax laws for your state of residence
• Give your estate plan a “check-up” as soon as possible!

As you and your attorney are reviewing your estate plan, keep in mind that the estate tax situation is likely to change again in 2011 (and may even change before 2011, effective retroactively), and try to plan accordingly. As Money Watch author Deborah Jacobs writes, “Whatever might be happening in Washington, no one should postpone the necessary steps. Just because Congress is inefficient and disorganized doesn’t mean that you must follow suit.”

As noted in the Wall Street Journal article entitled “Repeal of Estate Tax Creates Planning Dilemmas“,

“You could be in a situation now where everything would go into a trust downstream to the kids and nothing is left to the spouse,” said Greg Rosica, a tax partner at Ernst and Young. “There is a need to revisit the basic estate planning documents to make sure that what you intend to have happen really does happen.”

There are more surprises waiting: the estate tax is scheduled to return with a vengeance in 2011. Beginning in that year, only the first One Million Dollars will be free of estate tax (as compared with $3.5 million in 2009). Complicating the matter still further is that Congress could enact remedial legislation later this year to address these concerns. If it does so, Congress may attempt to make the changes retroactive to the beginning of this year; but, whether this effort at retroactivity will be upheld will likely ultimately be decided by the courts, perhaps years down the road. In a word, there is suddenly much uncertainty in the estate planning arena, and this uncertainty may be with us for a long time. Couples concerned about this should have their plans reviewed by a competent professional. At a minimum, they might revise their plans to build in flexibility mechanisms in order to address future changes in the law as they unfold.

The House recently voted not to let the estate tax expire, but instead to let it continue indefinitely at the current rate. Unfortunately the legislation has yet to make it through the Senate, and considering the gridlock that body is experiencing over health care reform, holding our breath for a decision on the estate tax before year’s end isn’t recommended.

The issue that estate planners are most concerned about at this time is not actually what the final decision will be (although that certainly is important), but how long it will take our government representatives to reach that decision. It is generally assumed that any decision reached in 2010 regarding the estate tax will be retroactive, which means that any estates opened next year before the decision is made might at some point have to pay estate taxes retroactively. The possibility of retroactive estate taxes means that holding off on your estate planning until after the legislation has passed is not as wise a decision as you may think.

We know our lawmakers have a lot to think about as 2010 approaches, but so do you—the taxpayers. Let us help you start the New Year off on the right foot: Making your own decisions about your estate planning, and keeping one step ahead in the game.