Tuesday, March 16, 2010

The Federal Estate Tax - What Does It Mean To You?

Greetings and welcome to the first installment of the BridgeBuilder Blawg.  BridgeBuilder - Plans for Life is a practice group of Kevan D. Acord, P.A. specializing in comprehensive estate planning that helps families enhance their lives today and secure their futures for tomorrow.  We at BridgeBuilder hope that this will become a regular and informative blawg covering the vast topic of estate planning.  This blawg could not come at a more critical time as the current flux of the federal estate tax can affect you and your family in many ways. 

Over the next several weeks, we will provide an overview of the current history of the estate tax, draw your attention to the uncertainty of the future of the estate tax and explore how this affects you and what steps you can take to ensure that your plan addresses all possibilities.  From there, we will highlight what makes BridgeBuilder different while continuing to address topics that are relevant and important to you and your family.

THE FEDERAL ESTATE TAX – WHAT DOES IT MEAN TO YOU?  A brief review of the law will help explain why this is so significant.  We were in the middle of the phase in of the Taxpayer Relief Act of 1997 when the Economic Growth and Tax Reconciliation Act of 2001 (“EGTRRA”) was enacted.  The 2001 tax act, signed into law by President George W. Bush, gradually reduced the maximum rate of the federal estate tax (and the equally onerous generation-skipping transfer tax on transfers to grandchildren) from 55% to 45%.  It also gradually increased the amount of property that you could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009.  That means that with basic estate planning, a married couple could pass up to $7 million free of federal estate tax, if they both died in 2009.

The following shows the phase out of the federal estate tax from 2002 to 2009 (applicable exclusion amount and tax rates):

2002                       $1M (41% - 50%)

2003                       $1M (41% - 49%)

2004                       $1.5M (45% - 48%)

2005                       $1.5M (45% - 47%)

2006                       $2.5M (45% - 46%)

2007 - 2008          $2.5M (45% flat rate)

                                    2009                       $3.5M (45% (flat rate)

Then, in 2010 only, the 2001 tax act repeals the estate tax.  But like a horror film character who just won’t die, under the existing law the estate tax returns again on January 1, 2011 – only at a much lower $1 million exemption and a higher maximum 55% tax rate!  This strange “now it’s gone, no it isn’t” effect is the result of a rule in Congress that attempts to limit budget deficits.

Most practitioners anticipated that this would never happen; almost no one thought that Congress would allow the estates of decedents who die in 2010 to escape federal estate tax.  The current situation presents more problems than opportunities for estate planners and their clients.  Until next time…