Taxation & Estate Planning

Estate Tax Changes? (aka: No One Has Any Real Idea What’s Going To Happen)

By Michael D. Bonasera, Esq.

Notwithstanding one’s belief in mythical orthodonture-bartering fairies, we all need to keep an eye on where the estate tax is going.  JLM of the Trust & Wealth Management Marketing Blog gives us the following three possibilities:

1. Stay the same. As noted with approval on Freakonomics, President Obama is thought to still favor continuing the tax at this year’s level: 45% of everything over $3.5 million. (This is my preference as well)
2. Lower exemption. Some (many?) estate planners have warned clients that a populist backlash against “the greedy rich” could spur Congress to lower the $3.5-million exemption. (Unlikely)
3. Higher exemption. At the 3% withdrawal rate favored by Tiger 21 members and other cautious wealth holders, a $3.5 million inheritance would give an heir less than $115,000 a year to live on. Even twice that amount won’t allow you to live rich these days. See You Try to Live on 500K .

Some also call the estate tax the ’small business killer’  (or ‘killa’ if you’re nasty) and speculate that this is sufficient justification to hasten the death of the death tax.  The theory goes something like this:  Someone dies owning a small business…  The value of the home, the business, life insurance, investments, maybe even throw in a second home or vacation condo (nothing too opulent), and you get to $3.5 million pretty quick - not as quick as you got to $2 million when that was exemption, but still…  Now you got this “massive” estate tax bill (because the tax rate is pretty high at +40%) but with all the family wealth tied up in the small business, you don’t have sufficient liquid assets to pay it so something has to be sold.  And the business, they argue, is usually the first to go.  But I don’t know…  I would think the government would err on the side of keeping the income they know they’re getting from the tax now rather than wait for the speculative return on the taxes derived from the small business itself.

Full post as published by The Ohio Trust & Estate Blog on February 10, 2009 (boomark / email).