Before you stop reading because you believe this does not pertain to
you, lets talk about who may be impacted. If you are
single and your net worth is over $750,000 today or
married with a net worth over $1 million, this may impact
you. If you are about to say again this does not include me, the net
worth I am discussing is your net worth at death, not your
current net worth. To help clarify for either group, if you determine
your net worth is only $100,000 but you have a million
dollar term life policy on yourself, your net worth at death is now above my impact limits.
The Federal government, as well as many states, believes you should pay one last tax as you leave this world and as you are transferring your belongings to your heirs. The tax is the Federal Estate and Gift Tax. The problem was caused by the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). Through the negotiations of the Federal bureaucrats, the Act raised almost annually the amount of your net worth that was exempt from taxation, increasing the exemption from $1 million to $3.5 million by 2009. This of course was to avoid taxing thousands of individuals at their death but leave in place the tax to collect from the very wealthy.
The vacation I spoke of earlier is an oddity that can only be explained by a politician. In 2010, the Federal Estate Tax disappears. Should you die during 2010 regardless of how large your net worth is, you will owe no Federal Estate Tax.
Just so you can understand the impact, the Federal Estate Tax starts around 45 percent and may go as high as 60 percent of the value of your estate that exceeds the exemption limit!
But anyone or anything on vacation does return, and this tax is no different. Starting 2011, the Federal Estate Tax reappears but has its sights on more individuals than before. Prior to the vacation, by 2009 all of those with a net worth below $3.5 million received a free pass. But, starting in 2011 should your net worth exceed $1 million, and remember this includes the value of most life insurance policies as part of your net worth, you are once again subject to this tax with a rate beginning around 42 percent.
Planning for estate taxes is hard enough, but throw in the creativity of politicians, and it is almost impossible. If you believe the Congress will eventually "get it right" and eliminate the estate tax, do not bet on it. The tax has been "eliminated" before several times only to be resurrected when additional revenues were needed, and the easiest collection source was those nasty rich people who could no longer vote because they were now deceased. So if you relax your planning in the hopes of avoiding this tax and then it returns five, 10, or 20 years in the future, most likely you will not have the time or the ability to take planning steps to avoid or reduce the impact of the tax.
The best step to take today is to plan as though the Federal Estate and Gift Tax will always be in force. This is true provided the cost of planning does not diminish your current lifestyle. Most likely, should you implement plans to minimize the shock of this tax, and then find yourself not being impacted; generally, the result will be the creation of additional estate value that will transfer to your heirs. So the steps taken will not be lost, but increase what is transferred to loved ones, charities, or other heirs.
If your net worth at death is above the limits I have discussed, you should take time to meet with an attorney or qualified CFP. You should determine if changes to your will, life insurance plan, gifting, or your overall planning strategies are appropriate. We would be happy to meet with you if you have concerns, just contact our office or any local professional knowledgeable in this area.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial
Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas
and Registered Principal, Branch Office of and
Securities offered through CUE Financial, Member NASD, SIPC.