I almost posted this post with no words in it. Frankly, nobody on earth knows what the tax laws are going to be once the governemnt sorts it out. However, let’s talk about some possibilities.
What is the state of the law as of TODAY? Luckily today is a holiday (Martin Luther King Day) so the state of the Federal estate and gift tax laws TODAY should be in effect at least until Tuesday morning! The federal gift and estate tax laws have long been called “unified” although right now they aren’t as unified as in the past. Essentially gift taxes are taxes paid on transfers made during life and estate taxes are taxes paid on transfers made after death. There are some gifts that become more confusing but for today’s blog we will keep things as simple as possible and just refer to gift taxes as during life transfers and estate taxes as applying to after death transfers.
Let’s start with the gift tax laws. As of today you can gift $1,000,000 during your lifetime tax free. Yes, you have a $1,000,000 during LIFE gift tax exemption. You also can give $13,000 a year without any tax to anybody you like. These are individual numbers so a husband and wife can give $2,000,000 and/or $26,000 per year if set up properly. In the simplest of math let’s say you are single and wanted to write a check to your only child. You could write a check today for $1,013,000 without any tax. Any gifts over that amount would be taxed at a rate of 35% as of today. By the way, if you are thinking of that and need a new child feel free to contact me to discuss! Yes, that’s a joke.
At death, as of January 1, 2010, there is no federal (but some states still have) estate tax (or some call it a death tax). Thus, as of today (but subject to change almost any day now) you can die and leave your family $20,000,000 or $200,000,000,000 or whatever without federal estate tax. There are some potential new capital gains (or income) taxes now, that didn’t exist prior to January 1st. However, it’s a lower rate than the estate tax has been and we will not be talking about that today.
In recent history our federal government has consistently had an estate tax rate around 50%. Thus the new numbers are historically low. It was not that long ago that the highest marginal estate tax rate was 55% and, guess what happens January 1, 2011… the 55% estate (and gift) tax rate is BACK… unless the government does something sooner.
What could be done? Ok, this is the real meat and potatoes of my blog. Let’s start with the fact that you could die today with the last thought of, “well, shoot I am dying but, on the bright side, at least my kids won’t have to pay Uncle Sam that dreaded estate tax….” HOWEVER, not to rain on the dead’s parade but there is talk that if the feds ever figure out what they want the law to be they could make it a retroative application. Thus you could die today, January 18th, thinking there is no estate tax but then the feds decide to make the tax free amount $2,000,000 and make it retroactive to people dying after January 1st! Oh the horror!
However, the experts say a retroactive change in the gift tax rate could not be done. Thus, some experts suggest that people, with very large estates, consider making some gift taxable gifts ASAP and utilize the historically low 35% gift tax rate. This goes against the basic notion that you should never pay tax you don’t have to but many experts suggest this. Talk to YOUR tax expert to get her opinion.
Ok, ok but what’s going to happen? I really don’t know. However, I find it impossible to believe there will not be some gift and estate tax going forward. I say this because if the feds were serious about repealing the estate tax wouldn’t they also repeal the gift tax? Of course. However, they have not. As stated above, it’s still at a $1,000,000 exemption. Certainly begs the question…. So, with the assumption there will be an estate tax what level would it kick in?
My thought is the government clearly needs tax dollars pretty badly. The estate tax is a known money maker for the government. For a couple years now the vast majority of experts thought the $3.5m exemption level would stick. I myself think that’s more than reasonable. At $3.5m the tax effects fewer than 1% of the population. Probably something like 1/10th of one percent but I don’t know the official numbers. Even at $2m the tax would effect very few people. Thus you have a government in need of money, a tax that is a known money maker, and a tax that directly effects only a tiny percentage of the population… hmmmmm, you do the math.
What should be doing with your estate plan? If you have several million dollars you should continue your gifting program. Writing checks for $13,000 (or slightly less) is the easiest. If you want to get more bang for your gifting buck then you might look into an irrevocable life insurance trust (aka: “ILIT”) or family limited partnership (or Family LLC) which are often called FLP’s or FLIPs. You can also gift small pieces of real estate by deed. All of the above should be done with your estate planning attorney of course.
Also, in addition to the above, if you are married you should be reviewing your trusts with your attorneys to make sure your tax planning trusts are set up correctly. They may be called A/B trusts, credit shelter trusts, exemption trusts, QTIP trusts, bypass trusts and who knows what else. If you are married and have this language in your trust talk to your attorney to make sure your trust is accurate with the current uncertainty. Another day I will talk about these problems in more detail.
In conclusion, as stated above, nobody has any clue what the tax laws are going to be as this year goes on. The key is paying extra attention to your estate plan during this time of uncertainty.