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Planning For Your Estate, Tax Deal or Not

A lot of people who would have owed the federal tax under past rules are off the hook after Congress passed the tax deal. But that could also mean less work for tax attorneys and other advisers. They can expect fewer calls for help in finding ways around the estate tax. That might not be a good thing.

What’s good for the taxpayer can be tough for the tax-planning profession, which for years has “conjured up ways of beating the tax code, or minimizing its pernicious effect,” says Ned Watts, an estate planning attorney in Dedham, Mass. “This would mean most people don’t have to worry” about estate taxes, adds Watts.

Still, the temporary change hardly spells the end of estate tax advice. The package is a two-year fix, and political battles are certain to ensue over changes after that.

What’s more, the fix is not a carte blanche to ignore planning ahead. Anyone with between $1 million and $10 million in assets still ought to take traditional estate-planning measures, according to Watts and others. This could include naming which family member gets a summer home, deciding how to bequeath a piece of artwork, or whether to set up a trust for a grandchild. Even if not estate-tax driven, these tasks all require attention.

Elizabeth Schlueter, head of wealth advisory for J.P. Morgan Private Wealth Management, says many people ought to take another look at their wills, because “they either don’t have one, or the one they have has been sitting in a drawer.”

A big conversation for families with $5 million to $10 million should be over whether they should put assets into trusts, even without the estate tax looming (with the new high estate tax exemption of $5 million for individuals and $10 million for couples). A popular trust, the grantor-retained annuity trust, or GRAT, could get a big boost because the tax deal made no mention of changing the vehicle. Talk about limiting GRATs to ten-year terms — which would make them less attractive for passing assets along to family member gift-tax free — for the short-term came to nothing. In light of this, people should dust off those documents to set up a GRAT that have been “on the corner of the desk, waiting,” says Schlueter.

At the end of the day, far more people have to plan for the estate tax than actually have to pay it. In 2009, some 14,900 estate tax returns were filed while less than half of that number had to pay the tax, according to the Tax Policy Center. Next year, under a $5 million exemption, about 9,000 estates would have to file, with about 40% of them having to pay. What makes the gap between filers and payers? Any estate with a gross value over the exemption amount must file a return, but only those with a net value over the exemption owe tax. Net value is the gross value less various amounts not subject to tax, including bequests to a spouse, charitable contributions and the costs of administering the estate. That can suck up a lot of what would otherwise be taxed—which is why planning becomes a critical task, even if it’s a cumbersome one.

“Estate planning can result in much lower net values and hence much less (or no) tax,” says Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center.

And back to those estate tax professionals … they’re not going to feel the pinch for long, most likely. The federal estate tax has changed almost every year since 2001, as the exemption climbed to $3.5 million in 2009 from $675,000 in 2001, and the maximum tax rate has fallen to 45% from 55%.

In the end, regular changes in the tax code are likely to keep advisers “in business forever,” says Williams.

Readers, are you a reluctant estate planner? What do you make of estate and trust issues in the current climate?

Arden Dale is a Getting Personal columnist who writes about personal finance; she covers topics including tax and estate planning, retirement, investment strategies, and financial needs of small businesses.

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    • tax refund and loan

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    • Er is duidelijk een veel te weten. Ik denk dat je een aantal goede punten gemaakt ook in het Features. Blijven werken, great job!

    • There are still many lifetime benefits to utilizing revocable living trusts to manage and transfer wealth. It has been pretty odd to see so many “commentators” advocate the return to “I Love You Wills”.

      With expanding life expectancies, blended families, and creditor protection issues, seems like the classic tools will remain quite important for most families to consider. Taxes are only one consideration…and they’ll be back….

    • Question: if I formed a corp. which owned several condos and profited $10K a year which I used to pay off the mortgages of the condos would that $10K be subject to taxation? Thanks!

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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