How to Plan Your Estate

How to Plan Your Estate

Never have I received so many phone calls and emails concerning the same tax subject. What subject?… the new estate tax law.

Confusion and uncertainty reign!

Here are some of the typical questions: (1) “My estate plan is done. Must I change it because of the new law?” (2) [This I-read-or-heard question, or some variation, is the most common question] “Everything I read and hear [on the radio, TV, at seminars and from my lawyer or other professional advisors] says the new law will be changed. Should I wait for the changes?” . (3) “How much will the new law cut my taxes?” (4) “I want to transfer [give or sell] my business to my kids. What effect does the new law have?”
Almost all of the other questions are some variation or combination of the above. What is most interesting is that most callers have a good understanding of what the new law does. They just don’t know what to do about it.

Let’s take a brief look at the most important provisions of the new estate tax law. The new law is a tiger that actually changes its estate tax stripes every year, except 2008, starting in 2002 all the way until 2011.

From the inception of the law in 2001 through 2009 here’s how the tiger’s stripes change year by year depending on the year of death:

Year Exclusion Highest Rate
2001 $675,000 55%
2002 $1 Million 50%
2003 $1 Million 49%
2004 $1.5 Million 48%
2005 $1.5 Million 47%
2006 $2 Million 46%
2007/08 $2 Million 45%
2009 $3.5 Million 45%

The exclusion is the amount of assets that can be left tax-free at death. For example, death in 2009 means $3.5 million can go to your kids tax-free. If your wife gets hit by the same bus double it to $7 million. Yes, proper planning means you must change your documents to cover death in any of the above years.

If you die in the year 2010, The tiger has no stripes. There is no estate tax. It is repealed. Terrific estate tax planning.

Unfortunately, the estate tax is replaced by a capital gains tax on appreciated property you own at death. Planning requires you to keep your life insurance in force to cover the potential capital gains tax.

If you die after December 31, 2010 the tiger will have the same stripes as in the year 2001. One exception: the $675,000 exclusion (for the year 2001) will be fixed at $1 million starting in 2011. How do you plan?… Do all the things I’ve been writing about for years in my monthly tax column, which appears in 57 trade journals, and in this website; for example:

  • A qualified personal residence trust for your residence
  • A recapitalization (voting/nonvoting stock) and a grantor retained annuity trust or an intentionally defective trust to transfer your business to your kids
  • A subtrust — to own your life insurance — for your qualified plans (like a profit-sharing plan, 401(k) plan or rollover IRA)
  • A family limited partnership for your other assets
  • Life insurance (subject to rare exceptions) must be owned by a subtrust, an irrevocable life insurance trust, an intentionally defective trust or your family limited partnership

Dig out my old columns, many of them are on this website (I suggest that you go to “FREE NEWSLETTERS”). They are just as valuable now as when they were written. Yes, we know how to eliminate the estate tax, whether the bus hits you (and/or your spouse) before 2010. Or after 2010.

As regular readers of my tax column know, for over 30 years, we have done a reader test from time to time. The new law demands a test so we can see what’s going on in the trenches.

You are welcome to join the test. Just send the following information:

  1. For your business. Your last year-end financial statement.
  2. Personal. A current personal financial statement for you and your spouse.
  3. A family tree. Your name, age and birthday. Same for your spouse, kids and grandchildren.

Send to Irv Blackman, Web Estate Plan Test, 3830 Estes Avenue, Lincolnwood, Illinois 60712. What’s our job?…To create the right Plan for you, your family and your business, and to coordinate the efforts of your local professionals.

Okay, that’s our plan to help you do your Tax Plan under the new and the old law. Let’s hear from you.