Dodging The Estate Tax - For Now

At the end of 2010, when Congress rushed to make sure that the tax cuts of 2002 didn’t expire, the legislation contained good news and bad news , particularly regarding the estate tax.

The good news regarding estate taxes? There’s now a $5 million exclusion for individuals, which means that if you die, your estate won’t owe any estate taxes if it is worth less than $5 million.

The bad news? The new rules are in effect for only two years. After that, anything can happen.

“By putting the exemption at $5 million, they’ve done a lot of people favors by taking them out of the equation,” says Michael Lammers, Senior Vice President and Chief Trust Officer for Investors Independent Trust Co. in Boulder. “But there’s still a great need for people to do estate planning.”

Regardless of the amount of assets in a person’s estate, a plan for distributing those assets must be in place. Otherwise, courts decide how to handle the estate.

Surviving family members can find themselves in a difficult position when someone dies without leaving current estate-planning documents or a will.

“Dying without a will is not a good thing,” Lammers says. “It’s not that expensive to have a simple will in place.”

Lammers suggests that people consult a good estate-planning attorney to examine their options, even though the estate tax isn’t an immediate problem for most families. A good estate plan can make the distribution of assets run more smoothly.

Because the estate tax exclusion amount and other rules seem to change every few years, it is important for people to think about the structure of their estate, says Billie Castle, a trust and estate planning attorney in Grand Junction. Even families who did their estate planning years ago should revisit and update their plan.

“People did their estate planning with the idea that they would never have to touch it again,” Castle says.

However, certain arrangements involving marital and family trusts that once were effective now might be leaving people open to high capital-gains taxes, Castle says. Revising old estate plans and restructuring financial arrangements potentially can save significant money. Revisions also can introduce some flexibility into the plans to deal with changes that might come along after the current estate-tax laws expire in 2012.

“The old estate plans are more likely to bite somebody than the estate tax ever would,” Castle says.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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