Under the current system of estate taxes, you owe no federal estate tax unless your estate is greater than the threshold, which is $2 Million in 2007 and 2008. The threshold rises to $3.5M in 2009, and the tax is supposed to be eliminated for those who die in 2010. However, the so-called sunset provision provides that estate taxes will be changed significantly, and the new threshold for people dying in 2011 and thereafter will be reduced to a mere $1 million.
It is highly doubtful that this phase-in and phase-out of taxes will be implemented, but based on the projections and “flavor” of the current Congress, it appears that there will be a political agreement to settle on a figure somewhere between $3.5 million and $5 million after 2009. This will give your lawyer the ability to actually plan without regard to what specific year you anticipate that you will die.
It is estimated that estate taxes affect approximately only one percent or less of the population. This being the case, there is not much sentiment by the masses for the elimination of taxes, but the anticipation of the total elimination of estate tax is not realistic at this time.
Nevertheless, in the event that you don’t have an estate tax liability based on either the fact that you are now under the threshold, or if taxes were to be eliminated by the federal government, there are still several issues to consider, such as the taxation of your retirement plans, the potential for taxes on gifts and state estate taxes.
One of the largest assets you probably now own is your qualified 401(k) or IRA retirement plan. And since there are significant income taxes due if you were to receive a lump sum distribution from them or even from an annuity, you need to plan around this type of deferred income.
Many people believe that their retirement plan or annuity is a tax-exempt asset, but this is truly not the case. Income taxes are due on these assets at some point in most cases. When this happens, you will be heavily income taxed unless there is a plan in place to minimize tax liability upon receipt of the funds.
Although many states tie their state taxes to the federal limits, there are a significant number of states that have “decoupled” from the federal program, and these states have their own limitation and exemptions, as well as tax rates. Some states have exemptions of $600,000, and some have exemptions of $2 million.
There are also states, such as Massachusetts, which have an exemption of $1 million for individuals who die with assets less than $1 million. However, as soon as the estate exceeds $1 million, the exemption disappears and taxes are due from dollar number one at a rate beginning at 3%, with a maximum rate of 16.4%. This may sound high, but it is a relative “bargain” considering that federal estate tax rates begin at 45%.
Somewhere buried in the proposed legislation is the continuation of a gift tax for gifts made during your lifetime. In order to minimize your estate for estate tax purposes, even for the state, it is important to always review not only the federal limitations on gifts but also whatever state statutes that determine what may be exempted or taxed when you transfer property during your lifetime.
The “hopeful” increase in the exemption of estate tax requirements will certainly benefit individuals who are currently in a taxable bracket and now will be exempted from estate taxes. Those already exempted do not have to worry about estate taxes except for those possibly in their own particular state.
Nevertheless, there are always additional tax issues that need to be reviewed before you feel secure in the fact that you have no liability for federal estate tax purposes and are, therefore, in a situation where you don’t have to be concerned about any tax income, gift or estate issues.
By: Hyman G. Darling, Esquire
Comments