Will you be tax exempt? Featured

8:00pm EDT August 26, 2008

More than seven years ago, President George W. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001. This legislation was designed to reduce federal estate taxes by increasing the exemption amounts and reducing estate tax rates over time, with a complete repeal of the estate tax scheduled for 2010. However, it is expected that Congress will act in 2009 to head off the scheduled repeal of the estate tax.

Against this backdrop, it is crucial to review existing estate plans and prepare for potential future scenarios.

“Estate plans should be revisited whenever estate tax laws are about to change significantly,” says Sally Larson Sargent, senior vice president and head of personal trust administration for MB Financial Bank in Chicago.

Smart Business spoke with Sargent about the current estate tax laws, what changes may be in store for the future and the importance of staying abreast of changes to the tax code.

What are the current laws in regard to estate taxes?

The federal estate tax exemption has increased dramatically since 2001, when it was $675,000. This year, the federal estate tax exemption is $2 million. Next year, the exemption will increase to $3.5 million, with a complete repeal of the federal estate tax scheduled to take place in 2010. Federal estate tax rates have dropped over the same period of time, from 55 percent in 2001 to 45 percent this year and in 2009.

If Congress takes no further action, the federal estate tax will disappear in 2010, only to be reinstated in 2011 with an exemption of $1 million and highest estate tax rate of 55 percent. It’s a strange situation. Few estate planners believe that federal estate tax regime will play out over the next few years as initially enacted back in 2001.

What changes in the estate tax law are being discussed?

Various bills have been introduced over the last few years to address the pending repeal of the estate tax, but none has made it into law. Today, there doesn’t seem to be any real expectation that the estate tax will be abolished as the law currently anticipates — both because of budget deficits and the belief that such a move would not be supported by a majority in Congress. Assuming that the estate tax is not abolished in 2010, there have been recent proposals that would freeze the federal exemption at the 2009 amount of $3.5 million and others that would increase the exempt amount to $5 million. At recent Congressional hearings, estate planning experts have suggested modernization of the rules that apply to installment payments of estate taxes for closely held businesses. Experts also have suggested that the exemption amount should be ‘portable’ between spouses, meaning that if an exemption is not used fully in the estate of a deceased spouse, the unused portion should be available to the estate of the surviving spouse.

How do you anticipate the upcoming presidential election will impact estate tax laws?

All that we know for sure is that the estate tax laws are unlikely to be touched until after the November elections. After the election, Congress likely will make the estate tax a priority, given the looming repeal of the estate tax in 2010. Neither of the presumptive presidential candidates supports the full repeal of the estate tax. Sen. John McCain’s tax plan favors a permanent $5 million exemption and a 15 percent estate tax rate, while Sen. Barack Obama’s plan favors a freeze at the 2009 estate tax parameters of a $3.5 million exemption and a 45 percent rate. The likelihood of either plan becoming law will depend on political, economic and deficit-related considerations.

Why is it so important to stay on top of changes to the tax code?

A carefully crafted, flexible estate plan that anticipates changes in the estate tax laws is the key to minimizing taxes and maximizing what will pass to beneficiaries. The federal estate tax is only one component of taxes imposed at death, however. State taxes also can be significant. As the federal estate tax exemptions have increased over the last several years, many states have enacted new or revised state death taxes, because states no longer are receiving state death tax credits that previously were part of the federal estate tax regime. With many states ‘decoupling’ from the federal estate tax system and creating their own death tax regimes, planning for state taxes can be critical, as well.

SALLY LARSON SARGENT is senior vice president and head of personal trust administration for MB Financial Bank in Chicago. Reach her at (847) 653-2158 or ssargent@mbfinancial.com.