Estate
Tax Repeal? What Do I Do Now?
This
is my home on the first day of Spring. Makes one wonder
where the center point of spring is. We know it's not
Key West or Maine's Fort Kent. Perhaps it's the District
of Columbia?
Spring in
the Capital usually arrives on time. Legislation, on the
other hand, seems to know no season. What blooms in nature
we know is beautiful. On the other hand, what blooms in
Congress is unpredictable.
For those
of us who do Estate Planning, we simply wait. Our clients
are waiting as well.
Will the
estate tax be repealed? I don't think so. Will the
exemption be increased? Yes.
Increasing
the exemption can remove many estates from the tax rolls,
thus saving most family farms and closely held businesses
from a tax assessment that would jeopardize their future
viability, without materially affecting future tax revenues.
Repealing the estate tax, on the other hand, would have
a negative impact on non-profits and the state tax coffers.
Thus, if Congress could control its spending so that the
lost revenues* would be matched
by decreased expenditures, the non-profits and the states
would still be scrambling to secure funding for expenses
that simply will not go away.
A study done by PricewaterhouseCoopers
found that the repeal of the estate tax would diminish
charitable giving through bequests by $3 billion per year.
In Vermont, we can only guess at the impact on non-profits.
However, it may be easier
to estimate the impact on our own estate tax. Every state
has what we call in the trade a "Sponge Tax". This is
a tax equal to the credit allowed on the Federal Estate
Tax Return for taxes paid the state. Florida, for example,
collected $780 million in estate taxes in 2000. In short,
this "invisible" tax constitutes revenue sharing.
Repeal the estate tax at the federal level and it is automatically
repealed at the state level. Now what will the States
do to make up for the lost revenue, which is estimated
to total $9 billion a year in 2011?
More uncertainty.
Should we wait? In this connection, even the prior
bill repealing the estate tax gradually implemented the
changes so that death within 10 years could still trigger
a tax.
You
may want to consider using a "disclaimer" as a key component
of your estate plan.
Most estate plans for married
couples facing a possible estate tax, incorporate a Bypass
Trust (a/k/a the "Family Trust", "Trust B", the "Non-Marital"
Trust, "Credit-Shelter Trust", and a few other creative
titles). The trust is characteristically funded through
the use of a formula clause designed to take advantage
of the available exemption (currently $675,000 and scheduled
to increase periodically so that by 2006 it will rise
to $1 million).
If the exemption increases,
the formula will adapt and the funding of the trust will
usually increase. Consequently, many estate plans now
in existence will respond well to an increase in the exemption.
On the other hand, they are not designed for a repeal
of the estate tax.
If, however, the trust were
to be funded by a "disclaimer", the surviving spouse would
determine the amount of the funding upon the first spouse's
death. If at that time the estate tax has been repealed,
the surviving spouse may decide not to fund a trust whose
sole purpose is estate tax avoidance.
In many estates, a Bypass
Trust serves other useful purposes. Using a trust designed
for "disclaimer" is not for everyone. Furthermore, there
are some technical requirements that need to be met including
a deadline of making the election within nine months from
death.
Before talk of repeal, disclaimers
had become popular as a result of a need to integrate
large IRA's into a plan. Many taxpayers had discovered
that their retirement plan had become their most significant
asset and they would have to make a choice between estate
and income tax savings. Preferring to delay that decision
until the latest possible date, they frequently selected
their spouse as the primary beneficiary and their trust
as secondary. This gave the spouse the ability to disclaim
all or part of his or her entitlement if the estate tax
savings resulting from the funding of the Bypass Trust
outweighed the benefits of tax deferral resulting from
an IRA Rollover. Now, more than ever, it is important
to consider designing your beneficiary designations to
allow for qualified disclaimers.
For more information, please
see the following links:
Qualified
Disclaimer Trusts
Glossary
of Trust Terms
Enjoy the Spring, when and
if it arrives. For those of our clients who are still
in Florida, please be aware that it is not safe to come
back yet.
*
The Joint Committee on Taxation estimated the cost of
the Bush estate tax repeal to be $236 billion, but this
only covered the 9-year period from 2002 - 2010. The Center
projected the 2011 cost by increasing the JCT estimate
for 2010 ($55.3 billion) by the rate of growth in the
economy.
