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New Estate Tax Provisions

By: Investor Solutions

By: Investor Solutions, Inc.

Think of this! all your life you pay taxes to Uncle Sam on your earned income, retirement income, investment returns, and many more just to name a few. At some point in life you surely deserve a break, right? Well guess again, even when you die there’s a “final blow” and to some the largest tax bill ever applied to their assets. This tax is called the “estate tax” and it can eat up to 48% of your assets if you don’t properly plan ahead.

In 2004, the individual amount excluded from estate tax consideration was raised to $1.5 million up from $1 million in 2003. This allows your first $1.5 million of assets (real estate, investments, insurance, retirement accounts, personal belongings, etc…) to be excluded from estate taxation, but watch out once you exceed that dollar figure. Some good news on the horizon was the enactment of The Economic Growth & Tax Relief Reconciliation Act of 2001 signed into law by President George W. Bush. Under this Act thru year 2009, the estate tax exclusion amounts will continue to increase and the applicable tax rates will shrink. Although the new law provided the largest tax reduction since 1981, it also included a “Sunset Provision” which constitutes that after December 31, 2010 if Congress does not extend the provisions, the law reverts back to those that existed prior to the new act. (See Table A)

Table A

Year Top Tax Rate Exclusion Amount

2002 50% $1 million

2003 49% $1 million

2004 48% $1.5 million

2005 47% $1.5 million

2006 46% $2 million

2007 45% $2 million

2008 45% $2 million

2009 45% $3.5 million

2010 Repealed N/A

2011+ 55%* $1 million*

* Unless Congress enacts subsequent legislation, estate tax rates and the exclusion amount revert to pre-act levels.

Although many individuals seem to think that they’re total assets are well under the “Exclusion Amount” it is always a good idea to take a through look at your situation. How do you get started to review your Estate Plan?

1. Dig up any current estate and tax planning already in place.

2. Make a list of all your assets and the fair market value of each (don’t forget life insurance)

3. Review your current trustees and beneficiaries of retirement accounts for accuracy.

4. If your assets exceed the Exclusion Amount listed above, you may have an estate tax problem.

Once you have determined that there is a need for estate planning, you may want to consider some of the following strategies to include in your plan:

If you’re married, use both estate tax exemptions

Plan properly, since both US citizen spouses are entitled to receive the $1.5 million exclusion (2004). That’s $3 million you can remove from your joint taxable estate! Think twice about passing your $1.5 million exclusion directly to your spouse, other viable options may be available that can remove these assets from both of your estates.

Remove assets from your estate before you die.

Live it up, and enjoy life while you can and use your assets. Give your assets away, appreciated assets are best to gift. (Recipient will retain your cost basis)

Make annual tax-free gifts.

Currently, the annual gift exclusion amount is $11,000 per person ($22,000 jointly with your spouse); this is a great way to slowly deplete your estate under the table threshold. This will not reduce your lifetime $1 million gift tax exclusion amount.

Plan for Liquidity in your estate at death.

Buying life insurance to pay remaining estate taxes and then transferring it to an Irrevocable Life Insurance Trust can be advantageous. In most cases, federal estate taxes are due within nine months of date of death.

Update your current Will.

Check your Will to ensure that it reflects recent changes (marriage, divorce, etc…). Add a Transfer-on-Death feature to certain assets if available.

Use of a Revocable or Living Trust.

Certain assets can be t itled in the name of the trust; this provides protection from court challenges and avoids the cost of probating the property.

It is always preferable to have some type of estate planning in place as opposed to not having planned at all. It’s also natural to find gross procrastination when it comes to estate planning, so just ask yourself how you feel about subjecting your heirs to a $480,000 estate tax on a $1 million taxable inheritance? If you feel a little uneasy about the possibility of paying that much in taxes it may be time you seek the help of a qualified professional. You should consult a Certified Financial Planner or Certified Estate Planning Attorney to help you tailor a plan that effectively distributes your assets in the manner you desire at the lowest tax cost to you and your heirs.