Looming Estate Tax Changes Make Planning Vital
by Seamus Smith
As we inch closer to Jan. 1, extensions of the Bush-era tax cuts grow less likely. That means you should take a new look at the structure of your own estate plan.
The expiration of Bush-era tax cuts in January poses tax consequences not only for the wealthy, but also for those who consider themselves less than wealthy. One of the most burdensome consequences is related to the estate tax, but with proper planning, the impact can be eliminated or at least minimized.
Without action by Congress, the federal estate tax will return to its 2001 level as of Jan. 1, 2011, replacing the carry-over basis scheme that is currently in effect for 2010 in lieu of a federal estate tax. The estate tax is assessed on an individual’s assets owned at death, including assets owned directly, such as real estate, retirement accounts, stocks and bonds, and assets transferred during life where some kind of beneficial interest or right of control was retained. Insured-owned life insurance policies are valued at the death benefit for purposes of the tax. Under 2001 estate tax provisions, any assets in excess of $1 million that do not pass to a spouse or charity are taxed at rates between 41 percent and 55 percent. If George Steinbrenner had passed away in 2011 rather than this year, his family would be facing an estate tax bill of more than $500 million.
Practitioners have long expected that Congress would revise the estate tax for 2011 and beyond to include an exclusion amount of $3.5 million, perhaps adjusted periodically for inflation, and a tax rate of 45 percent on any assets in excess of the exclusion amount. This exclusion amount and tax rate reflect the federal estate tax provisions applicable to individuals who died in 2009. News from Washington about changes to the estate tax was fairly constant earlier in the year, but it has now trickled to a stop. As we come closer to the end of the year, reform becomes less likely.
Two Key Actions
Given that, prudent taxpayers should undertake two tasks. First, any couple with a net worth near or in excess of $1 million, including the death benefits of any life-insurance policies, should make sure that their estate plan contains provisions maximizing the use of each spouse’s exclusion amount to allow a total of $2 million to pass free of the estate tax (often referred to as an A/B, marital/bypass or QTIP/credit shelter estate plan).
Unfortunately, plans created within the past several years lack these provisions due to planners’ expectations that the exclusion amount would be permanently pegged at $3.5 million and clients’ unwillingness to pay for provisions that may not be needed. Without these provisions, a couple may only be able to pass along $1 million of assets free of the federal estate tax.
Second, any individual or couple with a net worth near or in excess of $1 million should consider gifting assets to their ultimate beneficiaries to shield the assets from the estate tax. Gifts must be structured carefully because there is a federal gift tax that is assessed against donors, and primarily exists to enforce the federal estate tax. Currently, each individual can make $1 million of taxable gifts during life before gift tax must be paid; any gifts above the $1 million exemption incur tax for the donor at a rate of 35 percent. Any portion of the gift exemption that is used decreases the donor’s estate-tax exclusion amount, dollar-for-dollar.
There are two particularly helpful types of gifts that are not subject to the gift tax and do not count against the $1 million lifetime gift exemption. An individual may pay the medical and educational expenses of any number of people. There is no dollar limitation, but payments must be made directly to the service provider. The beneficiary cannot be merely re-imbursed for the expenses. An individual may also gift up to $13,000 of cash or property to anyone each year. This amount is periodically updated to account for inflation.
There is still plenty of time for Congress to prevent the reappearance of the 2001 estate tax, but you should take the time to have a professional review your documents for appropriate estate tax provisions and to determine whether you need to start gifting. As the proverb goes, “he who fails to plan, plans to fail.” 
Seamus Patrick Smith is a principal with the Will and Trust Center in Leawood, Kan.
P | 913.754.1368
E | smith@thinkingbeyond.com