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What's Going On With Estate Taxes?

Posted by Cheryl Costa  December 21, 2009 10:04 AM

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With 10 days remaining in 2009 it is hard to believe that no one knows for sure what the estate tax will be in 2010.  In 2001, new tax legislation paved the way for a gradual increase in the federal estate tax exemption.  (In 2001, the exemption was just $675,000.  Today, the exemption is $3.5M.)   However that legislation had a sunset provision -- one that specified that there would be no estate taxes at all due in 2010 and a reversion back to a $1M exemption in 2011.  The thinking was that there would be plenty of time before 2010 and 2011 to decide on a "permanent" fix that everyone could agree on. 

And for almost all of 2009, lawmakers have been arguing about how to fix the estate tax.  At times, it looked like an agreement was just around the corner.  At the beginning of 2009, nearly everyone expected that some form of guidance would be available by the last quarter of 2009.  However, it now looks like there will be no agreement until early in 2010.  And, to add insult to injury, it looks like whatever provision is passed will be retroactive.  Imagine trying to settle the estate of someone dying in early 2010 and not even knowing what rules will apply.

Furthermore, many people who need updated estate documents have delayed having these documents prepared because they dont know what the final exemption amount will be.  Democrats are generally in favor of keeping the current $3.5M exemption in place on a permanent basis.  Republicans would like to see a higher limit -- $5M and the inclusion of a portability provision. (This would allow a $5M exemption for a husband AND a wife.)  In my opinion, the portability provision is huge.  Currently, a husband and wife can protect up to two times the exemption equivalent but they generally need to set up trusts to do so.  The end result is that if you are smart enough (or wealthy enough) to visit an estate planning attorney, you can save yourself a large amount of estate taxes while the average person may pay thousands in unnecessary taxes because they did not have these trusts drafted.

 

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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