Planning Your Estate

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As a tax consultant, I have personally met with hundreds of business owners throughout the United States, from all walks of life, engaged  in a wide variety of industries. While the differences between individual business owners are enumerable, I have found that, by and large, these owners have one circumstance in common—they are all very busy.

To keep up with project deadlines, employee issues, marketing, bills, budgets, cash flow and all other issues vital to keeping a business healthy, most of the business owners I have encountered have a tendency to neglect themselves and their families with regards to  estate planning. When meeting a business owner for the first time, I often find that he or she has either no estate planning of any kind in place or  the estate plan is incomplete.

The relative confusion regarding federal estate taxes has not helped in this area. Several business owners I have met with falsely  believe that the estate tax is being abolished permanently, and have therefore found no need for estate planning. Others have thought  it best to put off preparing an estate plan until Congress provides greater certainty. There were also those who believed that since their  states were relatively small, no estate tax planning was warranted; therefore, these individuals avoided it altogether. While it is  true that minimizing estate taxes is a sound reason for preparing an estate plan, minimizing internal family conflict and protecting  family members from future unsavory creditors should be an equal, if not primary, motivation.

The rules governing the federal estate tax are in flux. Generally speaking, under the current rules, an individual may pass up to $3.5  million worth of assets to his or her heirs without incurring a federal estate tax. Any amount greater than $3.5 million will be taxed at  45 percent. This amount, which may pass free of tax, is also referred to as the applicable exclusion amount. In 2010, the federal estate  tax is scheduled to be temporarily repealed, only to be reinstated in 2011. However, during this time, the applicable exclusion amount  s to be reduced to $1 million, with a tiered tax rate topping off at 55 percent. This increase of the top estate tax rate and  reduction of the applicable exclusion amount is due primarily to the expiration of tax cuts passed by the Bush administration.

Despite the scheduled changes, it remains unclear as to whether these reductions to the credit and increase in the maximum rate will  actually be realized. In a recent budget proposed by the Obama administration, the 2010 temporary repeal of the federal estate tax is  to be scuttled in favor of maintaining the $3.5 million applicable exclusion amount and 45 percent tax rate present in 2009.  Historically, the estate tax, or death tax, has gone through a number of permutations beginning in 1797 when the tax was imposed to  raise revenue to build the U.S. Navy, only to be repealed in 1802. The tax continued to be enacted and repealed for various funding  measures until it was made more permanent in 1916 with a rate of 10 percent. Then, during World War II, the rate rose dramatically to 77 percent to help fund the war effort.

Today, in light of the federal government’s current military and economic stimulus spending, Medicare and Social Security projected  shortfalls, it appears that Congress, with its Democratic majority, may be inclined to allow the Bush administration’s tax cuts to expire  as a means of raising revenue, without penning any new legislation to raise taxes. Accordingly, while the final outcome of the  applicable exclusion amount and rate remains uncertain for 2011 and beyond, the odds are stacking in favor of a lower applicable  exclusion amount and higher rate. However, in the very unlikely event that federal estate taxes are repealed, there will still remain  other very compelling reasons to prepare an estate plan.

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