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The Death Tax: Why the Name is Misleading and What You Need to Know

By: Rachel Weinrib

While the debate in Congress over the repeal of the federal estate tax continues, the problem is: How are you supposed to be planning considering the current uncertainties?

This year the federal estate tax exemption rose to $3.5 million (in effect $7 million per married couple) with a tax rate of 45% on any excess. The estate tax exemption will disappear completely in 2010, and as of now there will be no estate tax exemption at all. In 2011, the estate tax will return and the exemption will be $1 million with a tax rate of 55%.

This means, for example, if you are a single individual with a $5 million estate that you would like to leave to your children under the current federal estate tax exemption, the first $3.5 million will pass to your children without being taxed by the government. The remaining $1.5 million will be taxed at a rate of 45% and your children will receive an additional $825,000, totaling $4,325,000. Should the federal estate tax exemption disappear, your entire $5 million estate will be taxable at a rate most likely higher than 50%. This would mean of your $5 million, your children would be lucky if they inherited $2.5 million, as opposed to $4,325,000 under the current federal tax exemption. In other words, under the current regulations the government is getting a federal tax of $675,000 whereas should the regulations be repealed the government will be receiving in upwards of $2.5 million.

During the campaign, then-Senator Obama proposed preserving the $3.5 million exclusion and the 45% tax rate. In furtherance of this goal, a new Senate bill is before the floor to make today’s exemption permanent. Should this bill fail to pass, we risk having no exemptions thereby making your entire estate vulnerable to taxation.

The one thing that you should not be doing is sitting back and waiting. While complete, instant repeal is improbable, it is likely that the current protections in place will be lessened. Therefore, if you don’t want Uncle Sam dipping into your savings, planning is necessary to ensure that you take the most advantage of the accessible tools and techniques to lessen any tax on your assets at your death (or the death of you and your spouse).

Taxpayers who would like to lessen their estate, with the death tax in mind, may want to make transfers to their children during their lifetime. The IRS has become wise to certain estate planning techniques. Each taxpayer can make annual gifts of up to the Annual Gift Tax Exclusion ($13,000 for 2009) to as many individuals as desired and not use up any part of the $3.5 million death tax exclusion. A husband and wife can give $13,000 each to any individual in 2009 without any deduction from their allowable death tax exclusion. This is because to prevent individuals from giving away their estates before their death, the IRS Code provides that gifts to any one individual in any one calendar year in excess of the Annual Gift Tax Exclusion during a taxpayers’ lifetime reduces the $3.5 million death tax exclusion. This is one the reasons that the IRS caps the exchange of gifts.

There are three gifts, however, that may be made in addition to the $13,000 Annual Gift Tax Exclusion and still not deplete an individuals Lifetime Exclusion for death tax purposes, which are: (1) Medical bills (including health insurance premiums and unlimited in amount) paid directly to the provider; (2) higher education tuition (unlimited in amount) paid directly to the university; and (3) contributions to Health Savings Accounts.

Your current estate plan may no longer make sense. And a good one is important, even if you think you'll exhaust your assets by the time you die; you never know when that time will come. You deserve to leave behind whatever wealth you are able to accumulate and not be forced to pay taxes on the estates of decedents. I recommend that you to contact an attorney to assist in your estate planning needs. Furthermore, as a member of your community I also urge that you contact your local legislature to voice your concern on this issue and request that by 2011 this issue be revisited and stringent protections for our families estates be guaranteed.

For estate planning or additional information on this topic please contact Rachel Weinrib at Kirschenbaum & Kirschenbaum, P.C. at (516) 747-6700, ext. 317 or at Rweinrib@kirshcenbaumesq.com.

Additional educational articles may be found at www.kirschenbaumesq.com.