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Estate Planning

The Economic Growth and Tax relief Act of 2001 and the repeal of the estate tax for decedents who pass away after December 31, 2009 may be summarized as follows.

• For decedents who pass away after this date their estates are no longer subject to estate taxes , but  their heirs may no longer get a stepped up basis with respect to inherited property.

Essentially , what is happening is an exchange of taxes. A decrease in estate taxes and an increase in income taxes for an estate. The new rules concerning carryover provisions are complex. Usually the recipients of property passing at ones death receive the property with a basis equal to the lesser of

• The fair market value of the property on the date of the decedents death or the adjusted basis of the property in the hands of the decedent.

The executor of an estate may increase the basis of property by an aggregate amount not to exceed $1.3 million. For example, a decedent with an estate with a fair market value of $3 million dollars and an adjusted basis of $650,000. The executor may increase the basis up to an aggregate of $1,950,000. The executor may choose how to allocate the basis increase. In no case may the basis be increased to exceed the fair market value of the property. If a decedents fair market value of the estate is $1 million and an adjusted basis of $500,000, the executor may adjust the basis to only $1 million even though it is less than $1.3 million.

Pre Economic Growth and tax Relief Act of 2001

Estate planning is not just for the wealthy. In fact many people today need to consider an estate plan. The problem is most people are unaware they are wealthier than they realize and do not know that the tax will effect them. For instance, real estate equity, pensions, 401(k)s, investments, savings accounts and even life insurance can add up quickly making most people vulnerable to estate taxes. In 1997 President Clinton signed a law increasing the Unified Credit form $675,000 to $1,000,000 in the year 20006. The Unified Credit permits one to pass on 675,000 of their estate on to heirs free from estate taxes. The dilemma is that the remainder is subject to the estate tax that starts in this case at 37% and ends at 55%! The estate tax is also due and payable to the IRS 9 months from the date of death. In this case most families unfortunately have to come up with the cash or liquidate property or business interests that the deceased probably worked a lifetime to secure to pay Uncle Sam. 

Fortunately with the use of certain estate planning vehicles you can ensure that the estate you have worked hard to create over a lifetime of hard work is passed on to your loved ones and not the IRS. Survivorship life insurance policies were designed many years ago to provide cash upon the death of the second spouse for payment of estate taxes. Remember, with the unified credit you can pass on a certain amount of your estate free from taxation to your spouse. The estate tax then becomes payable upon the death of the second spouse. The survivorship life insurance policy pays the death benefit of the policy to an estate after the second death to cover any estate taxes that are due. This prevents the children and grandchildren of the deceased from liquidating assets of the estate to pay the IRS and to keep them where they rightfully belong--inside of the estate.