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Don't Wait Until Tomorrow

Granted, federal estate tax laws might change. But don't let that stop you from taking money-saving steps now.
June 1, 2000

Federal taxes usually due at death have recently grabbed the attention of the living. A number of Republican lawmakers, as well as GOP presidential hopeful George W. Bush, want to do away with the federal estate tax. Bush's plan would phase out the federal tax on large estates over an eight-year period.

Why the drive for repeal? Critics of the tax insist it's unfair. Congress did make some changes to estate tax laws when it passed the Tax Relief Act of 1997. Under the '97 law, the unified credit was raised over a number of years. In 2000, for example, the credit increased to $220,500. As a result, use of the credit now exempts the first $675,000 of an individual's estate from taxes ($1.35 million for married couples). Also, the credit increases over several years with the effective individual exemption reaching $1 million ($2 million for legally married couples) in 2006.

But although the current talk seems to revolve mainly around repeal, few analysts expect Congress to go quite that far. "Wiping out the estate tax is a very hard sell to make," says estate planner Beverly Brooks, who was president of the Society of Financial Service Professionals, and is currently a chartered life underwriter and an accredited estate planner with BrooksBittner & Associates LLP, in Dallas. Instead of a total repeal, tax experts are expecting lawmakers to make some additional adjustments to the existing unified credit.

One of the many tax experts who are predicting that efforts will be made to improve upon the already existing law is Evelyn Capassakis, a partner in charge of the trusts and estates group for PricewaterhouseCoopers in New York City. She says there is a distinct possibility that lawmakers will eventually decide to make the $1 million exempt transfer amount immediately available instead of having to wait until 2006.

Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.

Planning Takes A Back Seat

Despite these predictions, many entrepreneurs and taxpayers are in a quandary over what estate tax-planning steps to take now. Does it make sense to go ahead with tax-lowering strategies, or to wait for Washington to enact changes?

While they say it may seem self-serving, estate planners recommend taking steps now to do some estate planning rather than waiting for Congress to act. If you're concerned about changes in the law, you'll want to employ strategies that can be undone, says Capassakis.

Terence Stanaland, a CPA and attorney with Johnson Peddrick & Stanaland PLLC, a firm specializing in estate-planning, located in Greensboro, North Carolina, is in agreement that planning shouldn't stop. He recommends making use of strategies that don't result in outlaying money (excluding the transaction costs). "It's always possible to revisit an estate plan and make the necessary alterations if the federal estate tax laws do undergo more changes," he adds.

Regrettably, taxpayers are using the prospect of legislative action as reasoning to halt their estate tax plans, says Brooks. "There's a false sense of security that estate taxes aren't going to be owed," she says. As a result, the heirs of those procrastinating may end up paying more in federal estate taxes than they would normally pay. In addition, "it's unrealistic to expect people to make quick decisions while they are still grieving," she says.

All The Right Moves

That said, who should consider strategies to lower estate taxes? Estate planners say if your investments and the value of your business are on the rise and now total more than the $675,000 exempt transfer amount or will do so in the immediate future, it's time to do some planning. So, although the unified credit is rising and Congress may push it higher, "it won't increase nearly as fast as the value of an individual's business and investments," says Brooks.

In light of anticipated legislative changes, what kind of steps should you take now? Here are some to consider:

Here's why: Although there is no tax due at your death, your unified credit, which exempts $675,000 of your estate from federal taxes, disappears when you die. So, when your spouse passes away, only his or her credit is available-so that only $675,000 can pass untaxed to your heirs, rather than the $1.35 million that would go untaxed if both credits were used. As a result, your children and other heirs will be hit with a sizable tax bite. Remember: holdings exceeding $675,000 are subject to federal taxes as high as 55 percent.

To avoid this problem, consider planning steps that will allow you to leave a portion of your estate to your children.

Stanaland calls this strategy "a wait-and-see estate plan," because it anticipates a possible change in the federal estate tax laws. In this example, he says, "If the estate tax is repealed, the wife can inherit everything the husband has left her with no taxes due. However, if the estate tax is still with us, then she can disclaim the $675,000 exemption."

There are a number of other requirements as well, so check with your advisor to determine whether you qualify. Stanaland says very few of his clients actually qualify for the deduction because of the various requirements that must be met.

But Wait, There's More

If you take advantage of some of these planning steps, don't assume you'll never have to do it again. Estate planners say you should periodically review your plan and consider changes in your financial situation, your business holdings and events such as birth, death, marriage or divorce.

Devising individual estate plans to trim federal taxes is no simple matter. Make sure you sit down with your lawyer and tax advisor to get the job done. It provides more than peace of mind; the relatives you leave behind will surely appreciate the effort.

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