If your estate is valued at more than $1 million, now may be an excellent time to consult with an estate planning attorney.
President Barack Obama is battling with several U.S. senators, including those in his own party, over the future of the estate tax. The outcome of that battle is uncertain. The president would like to raise the tax rate to the 2009 levels of 45 percent on any estate valued at more than $3.5 million.
The opposing parties want to either eliminate the tax or keep the rate at 35 percent with the exemption adjusted for inflation. This year’s exemption is $5.12 million. But if no compromise is reached by year end, the estate tax will revert to pre-Bush era rates of 55 percent on any estate in excess of $1 million. The tax generally does not apply to inheritances passed to a spouse or a federally recognized charity.
The United States adopted the modern estate tax in 1916 as a way to check dynastic wealth and to help fund World War I, the estate tax rate has fluctuated over the last 100 years to as high as 77 percent prior to World War II and as low as the one-year elimination of the tax in 2010.
The original Bush-era tax cuts ended in 2010, but were extended due to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which is scheduled to sunset on Jan. 1.
President Obama wants to raise the tax to help reduce the fiscal deficit by about $276 billion. His proposal would raise about $100 billion more over the next 10 years than keeping the tax at current rates, according to the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute.
Some 7,500 estates would owe taxes next year under his proposal, compared with 4,000 if current policy continued, according to an analysis by the Tax Policy Center.
Under current rates the estate tax affects almost exclusively the wealthiest 10 percent of Americans, according to the Tax Policy Center. Of the 3,600 estates subject to the estate tax this year, 100 are classified as farming estates, according to the congressional Joint Committee on Taxation. Another 200 are small businesses. Lowering the exemption would certainly increase the number of small businesses and farms affected.
Historically the estate tax has forced some businesses to sell off portions of their company or land that have been in the family for generations. But business owners have the option of preserving their companies for their heirs by gifting portions of the business to heirs while they are still alive.
Once a business is transferred to certain kinds of trusts, any appreciation of the business is not subject to gift or estate tax. Also, asset discounts may apply to gifts of minority interests effectively lowering the value of the gift for tax purposes. Individuals wishing to reduce their estate also may make annual gifts of $13,000 this year per person tax free.
If you’re unsure about your estate, consult with a qualified estate planning attorney. Your attorney may have options you’ve never considered that can help you pass along the inheritance you want for your family.
Richard Barid of Richmond Hill and Michael Smith are co-founders of Savannah-based Smith Barid LLC.