January 2004 "Tax Relief Is Here! Why Plan An Estate Now?"

PLANNING FOR WEALTH AND SECURITY

By attorneys Jennifer and Jeff Hawkins

TAX RELIEF IS HERE! WHY PLAN AN ESTATE NOW?

Congress gave many Americans a great gift in the Economic Growth and Tax Relief Act of 2001. As of January 1, 2004, a person can die and pass up to $1.5 million to her family and friends without losing some of the estate to Uncle Sam as federal estate tax. This relief helps wealthy people and solves terrible tax problems for many families with more modest means.

WHERE WERE WE & WHERE ARE WE GOING?

Farmers and other business people pleaded with Congress for decades to ease their estate tax burden. Many family farmers complained that expensive death taxes prevented them from passing their farms to their children and grandchildren.

One million dollars is not as valuable as it used to be. An example may demonstrate the old tax burden on many farmers. Consider a 500 acre farm worth $2,000 per acre 1995. If the farmer died and left that farm to his grandson, the grandson could have faced an estate tax liability of $153,000. In addition to borrowing money to finance seed, fertilizer, fuel and equipment, the grandson would have to sell part of the farm or mortgage it to pay the tax. Meanwhile, crop prices were dropping every year and many farmers were filing bankruptcy because they couldn’t meet their mortgage payments.

The tax scene improved in the late 1990s as the amounts that families could pass tax free increased gradually from $600,000 to $675,000. Then, in 2001, the tax protection increased to $1 million. The relief continues as we enjoy the $1.5 million protection now and expect it to reach $2 million in 2006.

The estate tax future is uncertain. The scheduled relief reaches $3.5 million in 2009, and an unlimited protection in 2010, and then it drops to $1 million in 2011. Many tax analysts believe that the government will have cold feet before 2006, and that it will freeze the tax relief at $1.5 million or $2 million to protect states that depend on federal estate tax revenue.

SO…WHY PLAN NOW?

Tax planning remains a concern for people blessed with financial success. A husband and wife with more than $1.5 million invested in IRAs, land, and mutual funds may still need tax planning because the tax rate for each dollar over $1.5 million is 45%. Their combined tax protection is $3 million, but they must plan carefully to use the full $3 million. If they plan poorly, $1.6 million may still trigger a federal estate tax bill of $45,000 and a substantial Indiana inheritance tax bill.

The new tax relief permits some people to simplify their estate plans. Many estate plans were prepared to avoid the federal estate tax when the protection level was just $1,000,000 or less. Such a plan commonly included a separate trust for each of the husband and wife. If you and your spouse have separate trusts and your total wealth is worth less than $1.5 million, you can probably collapse that plan down to a smaller version. Good reasons may exist to keep the old plan intact, but you should discuss the plan with a skilled estate and trust planning attorney to decide whether your plan needs a tune-up.

Most people do not plan their estates to avoid death taxes. Few families worry at all about the federal estate tax because it does not threaten their estates anymore. However, concerns about probate administration, drug addicted grandchildren, gambling addicted children, and good old fashioned charity still dominate many estate planning conferences.

COMING SOON!

This column will describe estate planning ideas in the coming months that few people stop to consider. Watch for articles about funding education, supporting new ministries, and stretching wealth for future generations. Other topics may include how to use wealth to help disabled family members and how to keep irresponsible heirs from wasting wealth.

THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.