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Retirement Resource: A column by David Boike



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February 10, 2010 - Estate taxes may not be something you think about often, but lately they have been in the news due to an eleventh hour change of heart by the United States Congress. Trying to make sense of what was proposed to change and what Congress is now proposing in a new estate tax bill is important. The amount of taxes your estate has to pay upon your death could change depending on what politicians decide to do.

The Proposed Change

As of Jan. 1, 2010, estate taxes will be repealed for anyone who dies that year; this will mostly affect taxpayers with an estate worth more than $3.5 million who would have been subjected to estate taxes upon their death in years past.

An estate tax, also known as a death tax, affects the amount of money passed from an individual's estate to their beneficiaries. If an individual dies in 2010, his heirs will sidestep the estate tax. Under the Economic Recovery Tax Act of 1981, there is no estate tax on property between spouses, and in 2001, according to the Economic Growth and Tax Relief Reconciliation Act, the amount of assets that a person can exclude from federal taxes is completely repealed in 2010.

If the proposed change is passed, estate taxes will be repealed for 2010 however, in 2011 the estate tax law reverts back to 2001 levels and individuals will have to pay up to 55 percent on all but the first $1 million of their estate. Also when estate taxes disappear in 2010 all estates will have to pay a 15 percent capital gains tax that they currently don't have to pay. Unfortunately, this death tax relief is only beneficial to taxpayers who happen to pass away in 2010.

The New Estate Tax Bill:

On December 3rd, 2009, the House of Representatives passed an estate tax bill that would extend the 2009 estate tax level through 2010 and make the $3.5 million tax level for an individual and $7 million level for couples permanent. A 45 percent maximum tax rate has also been proposed by the Obama administration as part of the bill.

To explain what that means, if Congress does enact the new estate tax bill an individual could exclude the first $3.5 million of an inheritance and couples could exclude the first $7 million; under this bill individuals who receive an inheritance are taxed up to 45 percent on the inheritance if it is more than $3.5 million. This bill is now with the Senate.

If estate taxes are repealed in 2010, or if Congress decided to keep tax rates at their current level, you should consult a financial planner who offers estate planning services so you can determine how to best arrange and distribute your estate, minimizing the tax liabilities on your heirs.

Creating an estate plan can help ensure your heirs receive what you intend to leave them or, in the case estate taxes are not repealed, can help you reduce the amount of taxes your estate owes after your passing.

David Boike owns Retirement Resources tax, mortgage, and financial consulting practice in Clarkston with his sons, D.J. Boike and Jake Boike. Call 877-732-5751.

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