For most of the year 2010, we expected 2011 to usher in a fifty-five percent (55%) federal estate tax on all assets over one million dollars. Toward the end of 2010, President Obama signed legislation reducing this exorbitantly high death tax to thirty-five percent (35%) on assets exceeding five million dollars in value. However, the reduction only applies for the years 2011 and 2012.
If you plan on dying in the next two years, you are probably relieved. If you plan on living well past 2012, uncertainty regarding the marginal rate and exemption amount remains. Unless changes are made to the law, the estate tax rate for 2013 will revert to fifty five percent (55%), with only a one million exemption amount.
When planning, although we hope for the best, we must plan for the worst. The worst case planning scenario, then, would assume that you survive until January 1, 2013, at which time you pass and realize a fifty-five percent (55%) tax on all assets (including the value of life insurance payable as a consequence of your death), in excess of one million dollars in value.
So, here are my rules of thumb (my thumb, my rules :-)). I generally recommend that my clients consider setting up an Irrevocable Life Insurance Trust (ILIT) for all life insurance policies over two hundred and fifty thousand dollars ($250,000.00) and consider setting up a Bypass or Credit Shelter Trust for all marital estates that exceed one million dollars. A fifty-five percent (55%) tax means a substantial loss of wealth, and a substantially reduced inheritance. Most people will want to plan to reduce that tax burden as much as possible.
As the estate laws change, I will continue to update you so that you may better serve your clients and protect yourself and your family.
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