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Gina MacDonald: Estate taxes: What is a taxpayer to do?

It's The Law

Posted: November 5, 2009 7:17 p.m.
Updated: November 6, 2009 4:55 a.m.
We have had more than a decade of change in the federal estate tax laws. In 1987, the government increased the amount an individual could transfer before estate taxes were owing to $600,000. It stayed at that level until the year 2000 when the amount of exemption increased to $675,000.

In 2002, the exemption increased to the first $1 million, with the highest estate tax rate being 50 percent. The exemption increased again to $2 million in 2006 and $3.5 million for 2009.

We are supposed to be looking at estate taxes being repealed for one year in 2010. Thereafter the estate tax rate in 2011 is slated to revert to the first $1 million with the highest estate tax rate being 55 percent.  

It is believed the Democratic party is determined not to see the estate tax repealed and will be proposing a temporary one-year measure to prevent estate taxes from being repealed as of Jan. 1, 2010.

It is believed the estate tax current limit of $3.5 million will be extended for another year with any amounts above that being taxed at a 45 percent rate.

There is also some speculation an amendment could be proposed to exempt estates under $5 million from estate taxes with any amounts above that being taxed at a 35 percent rate.

In light of this and other changes, taxpayers need to review their estate plans with the following issues in mind:

Simplify if possible
The increase in the tax threshold from $600,000 at the beginning of the decade to $3.5 million today, coupled with the drop in most taxpayers’ net worth over the past year, means many people who once had taxable estates no longer do. They may be able to significantly simplify more complicated estate plans that were necessary in the past to eliminate or decrease taxes due at death.

Beware state tax laws
In the past, most states had very similar estate tax laws that were tied to the federal laws. As a result of changes in the federal estate tax. Many states that were tied to the federal system found their estate tax revenue dropping to zero. To increase their revenue, these states “decoupled” from the federal system and established their own estate tax plans. So far, California is not one of those states.

Taxpayers need to learn what the law is in their state (especially if they own property in multiple states) and whether their existing plan is up to date. This is especially true for taxpayers who have moved from one state to another since signing estate planning documents.

Review life insurance
All consumers should have their life insurance policies reviewed if they have had them for more than a few years. Some universal life policies that were based on projections made when the economy was stronger may be “underwater” and may need more robust premium payments to sustain them over the long term. The premiums of other policies may be based on old tables measuring life expectancy.

Here, consumers may be able to lower premium payments or increase the death benefit. Finally, policyholders should never simply drop policies they no longer need or can afford. They may be giving up a large benefit for their heirs and they may be able to sell the policy for a larger return than the policy’s cash surrender value.

Refocus estate planning
The threat of the estate tax had the beneficial effect of prompting many consumers to do estate planning. But it also sometimes diverted them from the real purpose of estate planning: To leave the legacy they want.
The estate plan people leave can benefit children and grandchildren for decades to come, or it can cause familial strife that tears a family apart.

The choice of executor and trustee and the terms under which heirs will receive property are vital issues that deserve your full consideration, regardless of whether taxes are an issue.

Gina Macdonald’s practice is limited to estate planning, trust administration, probate and elder law. She maintains her practice in the Santa Clarita Valley. Her column represents her own views and not necessarily those of The Signal. “It’s The Law” appears Fridays and rotates between members of the Santa Clarita Valley Bar Association. Nothing contained herein shall be or is intended to be construed as providing legal advice.


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