Get Ready for Increased Estate Taxes in 2011

By Chris Watkins

For several years, we have enjoyed ever-increasing estate tax exemption amounts.  Last year (2009), the exemption was $3.5 Million.  This year, there is no estate tax at all.  But beginning January 1, 2011, when the so-called Bush tax-cuts expire (also known as the Economic Growth and Tax Relief Reconciliation Act of 2001), we are facing the largest tax increase in the history of our country.  For this you can thank Congress, which has had years to deal with this, but chose to go home rather than do their jobs.  This means there is virtually no chance that this will be dealt with this year.

So what does this mean for estate taxes?  On January 1, 2011, the estate tax exemption (also known as the applicable exclusion amount) will drop to $1 Million per person, and the highest estate tax rate will increase from 45% to 55%.  This means that if you (either by yourself or with your spouse) have an estate greater than $1 Million, then your estate WILL owe estate taxes to the IRS.

Most people think, “I’m not worth anything near $1 Million.  What’s the big deal?”  One thing many people don’t realize is that you have to factor in the death benefit of life insurance policies you own on your life.  So if you have a house, some retirement savings, and a life insurance policy, you could easily have an estate tax problem.  Actually, the ones who suffer are your children, who will get a smaller inheritance.

For example, if your taxable estate is $2 Million at your death, the estate taxes will be $435,000.   The tax on a $3 Million estate would be $945,000.  And so on and so on.

Fortunately, with a little advance planning, you can prevent a huge amount of your estate being lost to estate taxes.  One common technique is called the “credit shelter trust.”  This allows a married couple to preserve both of their unified credits.  Another technique is called the “Irrevocable Life Insurance Trust” or ILIT.  This involves having an irrevocable trust own life insurance on your life, thus taking it out of your taxable estate.

Unless you are of the mindset that the government SHOULD get more of your money, then you owe it to yourself and to your loved ones to explore your options and do some estate tax planning.  If you would like more information on these or other techniques for reducing your estate, contact us for a consultation.