Financial Savvy – Who Needs an Estate Plan?

Just a wild guess-I bet that you don’t have an estate plan in place. You should, at a minimum, have a valid will and legally designate someone to take care of your financial decisions in the event that you are later incapacitated.  

But it’s also a good idea to have a plan that reduces future estate taxes that might be payable by your heirs. Although you can pass wealth to your spouse tax-free, his or her heirs will have to pay the bill later, so that’s not always the best strategy. You may have also heard that the estate tax is going away, but don’t count on it.

Here’s the Cliff Notes version of estate taxation. Under a law passed in 2001, President Bush’s first term of office, the estate tax rate has gradually gone down to its current rate of 45% and the amount of assets that are exempted has increased pretty dramatically, from $1 million per person in 2001 to $2 million in 2008 and $3.5 million in 2009 ($7.5 million per couple).  Under that law, the tax will be repealed as of 2010.

So, as long as you can stay alive until 2010, are you safe without an estate plan? Not really. As with most high-cost Congressional tax cuts, this one is incredibly short-lived-only one year in fact. It is due to be reinstated in 2011 with the original $1 million exemption and higher tax rate, unless Congress takes action to kill it permanently-at an estimated cost of about $1 trillion in lost tax revenues for just the first 10 years.

In case you’re wondering, the increase in the estate tax exemption over the last several years has primarily benefited the middle class and small business owners. About five in 1,000 estates will pay the tax this year, and only 3 in 2009. Estate tax revenues have not yet hit the government pocketbook too badly because the very rich are still paying most of their tab.

The upshot of all this is that I wouldn’t count on the estate tax to stay dead. Regardless of the results of the upcoming 2008 elections, it will be hard for Congress to justify a $1 trillion dollar tax cut aimed at the wealthiest Americans, particularly with the federal budget in serious imbalance.  

I think it more likely that future law might involve a higher exemption amount. But I literally wouldn’t bet the farm on that. At the $1 million exemption level, about four times as many estates will be subject to the tax, hitting family-owned businesses particularly hard because the business might have to be sold to pay the taxes owed.

So what should you do?  First, take an inventory of your wealth-business interests, home  equity, retirement accounts, life insurance, and other assets. If the total approaches $1 million or more, you should consult an estate planning professional. This is absolutely not a do-it-yourself component of your financial plan.

An estate lawyer will help you update your will, provide advice regarding planned gifts and bequests, recommend appropriate types of joint ownership of assets, and naming of beneficiaries on investment accounts  and life insurance policies. A lawyer can also help you set up trusts that will allow certain assets to avoid taxation and the time-consuming and often expensive probate process after your death.

If you don’t have enough assets to worry about the estate tax, I still advise that you regularly review the terms of your will to ensure that it is consistent with your intentions.

By Vickie Bajtelsmit, Professor of Finance

Colorado State University College of Business