The Estate Tax Turkey

Forbes.com
Business News Bulletin
Ashlea Ebeling 11.21.07, 6:00 AM ET

In the spirit of the holiday, we'll put a sweet glaze on the current half-baked state of the federal estate tax law: It gives family members an opening to talk this Thanksgiving about what would happen if one of them were incapacitated or died.

Under the current law, the federal estate tax disappears in 2010, for just one year, and then reappears in 2011 in its 2001 incarnation. That's absurd and no one believes it will happen. Indeed, just last week the Senate Finance Committee held a hearing, with Warren Buffet as the star witness, on what should be done about the estate tax.

Buffett, the nation’s second richest man, is leaving almost all his wealth to charity and spoke against repeal of the estate tax. At the same hearing, a Nevada rancher and an Iowa businessman called for repeal. It was a good show. But it was just that. Congress is unlikely to resolve this mess until after the 2008 election.

That’s why the most important testimony at the hearing was a warning delivered by Conrad Teitell, an estate-planning lawyer with Cummings & Lockwood in Stamford, Conn. Said he: "Putting off decisions until Congress acts can be hazardous to your wealth." And to your family's well-being.

Even folks without a lot of assets need to plan, or they could leave a mess behind for their survivors. And those with substantial assets need to make sure their estate documents can accommodate the ever-changing federal estate tax law.

Here's a Thanksgiving checklist:

--Make sure you've signed a durable power of attorney for financial (and possibly health care) decisions; a health care power of attorney if your first durable power doesn't cover health; and a living will. These are crucial documents that give someone else the ability to manage your finances and decide on your care if you can't, and that puts on record your philosophy towards care at the end of life. The forms vary by state; you can usually get them for free online from your state’s attorney general or bar association.

--Check (and update if needed) the beneficiary designations on all your life insurance policies (including your life insurance at work) and all your retirement accounts, including your 401(k) and individual retirement accounts. The beneficiary forms, not your will, control where these assets go.

--Finalize basic estate planning documents now: Get a will written and sign it. Otherwise, your assets will pass under state intestacy laws, possibly to someone other than the heir you would have chosen. To see what would happen if you die without a will, try out the intestacy calculator.

--Review your potential federal estate tax liability. Someone dying in 2007 or 2008 can leave $2 million to heirs other than a spouse free of federal estate tax. (Any amount can be left estate-tax free to a spouse, provided he or she is a U.S. citizen.) In 2009, this estate tax exemption rises to $3.5 million. The estate tax disappears in 2010, but it reappears in 2011, with the exemption limited to $1 million. A more likely scenario--although no sure thing--is that the exemption will settle after 2009 at $3.5 million.

--Discuss advanced estate planning techniques, if needed. A married couple with more than $2 million in assets should discuss what's known as a bypass or credit shelter trust with a lawyer. Also, if you don't want to worry about rewriting your will every time the law changes, ask about flexible techniques that will allow the executor of your estate and your heirs to adjust to whatever the estate tax exemption is when you die.

--Review your potential state estate tax liability: 23 states impose their own estate or inheritance taxes on money left to anyone other than a spouse, and the list is constantly in flux. Most of these levies kick in at amounts lower than the $2 million federal exemption. So if you have an old will designed to avoid federal estate tax, it might not be effective to avoid state estate tax.

--Give to your heirs now: You can give $12,000 worth of gifts to any other person each year, without eating into the (currently) $2 million estate tax exemption. That means a couple could give each of their children $24,000 a year. In addition, you can pay for education and medical care, without it counting against the $12,000; just be sure you write the check directly to the school or hospital.

--Give to charity now: Give to charity now, or with a bequest in your will, and your estate will be reduced by the amount of the gift. But if you give now, you'll be able to claim an income tax deduction too. Not sure of the charity yet? Then consider putting money in a donor-advised charitable fund now--you'll get to claim a charitable deduction for 2007, and can then dole out gifts to specific charities later.