Worry about 'death tax' for the right reasons

Category: Estate and Inheritance Tax

From the Op-Ed Section of the Houston Cronical a pointed look at the federal estate tax in Worry about 'death tax' for the right reasons:

"A couple of weeks ago, my 13-year-old son came home complaining about the death tax.

It was his first foray into the murky quagmire of politics versus policy. He did the best he could.

Did you know, he asked me, that if you die and leave me money, that the government will take half of it?

That line of thinking floats around blogs, water coolers and holiday parties like conversational spam, so there's no telling where he picked it up. I calmly told him that he should be so lucky."

The article goes on to describe the estate tax debate as "the stuff of political irony. It draws the ire of millions of people who are unaffected by it." as well as its limited reach to taxpayers in comparison to funds collected.

Estate Tax Repeal Vote Down Again (3rd time the charm?)

Category: Estate and Inheritance Tax

Last night the US Senate voted against the minimum wage hike, estate tax reform, other tax breaks bill recently passed by the House in an effort to push through estate tax repeal for the third time in the past few months.

From Bloomberg.com


"Senate Republicans bet on luring Democrats into voting for a reduction of the estate tax by combining it with an increase in the minimum wage and popular tax breaks. Last night they lost.

The Senate fell four votes short of the 60 needed to move forward on what Majority Leader Bill Frist called the ``trifecta'' legislation.

``The bottom line is that we bet on the wrong horses,'' said Finance Committee Chairman Charles Grassley, an Iowa Republican. ``Maybe we should've taken a bet that was more likely to pay off.''

The Senate, just before recessing for the rest of August, did approve 93-5 a measure to overhaul the U.S. private pension system that now heads to President George W. Bush's desk. Left behind are the pieces of the trifecta legislation. "

More coverage from The Washington Post - Senate Rejects Estate, Minimum Wage Bill

IRS Eliminating Jobs of 50% of Estate Tax Auditor/Attorneys

It seems that estate tax repeal has gone even further underground - can't get it done out in the open, then backdoor your way into it - ahh, the American political machine.

Last week I wrote about a stealth estate tax repeal vote - that was again defeated.

This week, we learn that the IRS is eliminating the positions of about 50% of the attorneys who audit estate tax returns. So, if you can't use the political process to eliminate a tax which only effects the top 2% of the wealthiest Americans, you eliminate the jobs of the people who are trained to enforce the tax? One of the reasons I often just want to shake my head.

Courtesy of Charles Rubin, Esq. at Rubin on Tax:

Rubin on Tax: IRS TO SIGNIFICANTLY REDUCE TRANSFER TAX AUDIT STAFF:

"IRS TO SIGNIFICANTLY REDUCE TRANSFER TAX AUDIT STAFF

The IRS intends to eliminate the jobs of almost half of the lawyers who audit gift and estate taxes. The IRS presently has 345 estate tax lawyers. The jobs of 157 of them will be cut in less than 70 days.

Kevin Brown, an IRS Deputy Commissioner, indicated that the staff cuts are occurring because far fewer people are now subject to estate taxes under the legislation enacted a few years ago than was previously the case. Others however, believe that the cuts are an attempt to effect estate tax repeal through the back door - that is, to significantly reduce audit activity on wealthy Americans.

Whether the staff cuts will have any impact on transfer tax enforcement depends on which side you believe. If there has been a significant reduction in audit activity due to the estate tax changes, then perhaps the staff cuts will not have much of an impact on enforcement. However, if audit activity has not been substantially reduced by reason of the tax cuts, then one would expect the staff cuts to hamstring the IRS in its enforcement efforts. Of course, even if less returns are being filed, the IRS could still retain the audit personnel and then simply conduct more audits on a percentage basis of all returns filed. However, Brown indicated that the incremental benefit of auditing more estate tax returns would not produce enough revenue to be worth the cost."

A Case for a Federal Inheritance Tax

Category: Estate and Inheritance Tax

In a different look on the estate tax repeal (or virtual repeal debate) Maya MacGuineas and Ian Davidoff in washingtonpost.com's Think Tank Town discuss the merits of repealing the estate tax and replacing it with an inheritance tax in "Tax Inheritance, Not 'Death'".

Under current law, the federal estate tax is a tax on the amount of assets you own at death. The estate pays the tax, and the net balance is distributed to the beneficiaries. A person does not pay any tax on his or her inheritance.

While I disagree with the article's summary of estate tax repeal opponents that "opponents of estate tax repeal have fallen back on a divisive class-warfare approach. The estate tax affects fewer than two percent of the richest Americans. Thus, they argue, the other ninety-eight percent of the population should oppose repeal." (see my prior posts of Truths about the Estate Tax - Debunking the Popular Myths, Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper, and other similar posts at Estate Tax - You and Yours Blawg where I discuss the cost passthrough of a repeal of the estate tax to other taxpayers - most likely in the middle brackets), the authors' thoughts about the alternative of a federal inheritance tax are intriguing.

In "Tax Inheritance, Not 'Death'", the authors propose that any inheritance should be treated as income and taxed as income. This would be in keeping with the theoretical underpinning of our current system of progressive taxes (ie: lower tax rates for lowers earners and higher tax rates for higher earners) on earned income. As for the argument that this is "double taxation" the article says "so what", new money coming to you is income, and income should be taxed. Recall that the current estate tax tends to act to tax all theretofore untaxed capital gains at a person's death, and rewards the beneficiaries with a new "stepped up" basis.

The heart of the argument for an inheritance tax is excerpted below:

While it may seem perverse to tax one person's earnings twice, a key feature of inherited wealth is that upon transfer it goes from being one person's income to another's. There is nothing unreasonable then, about asking the person who receives an inheritance to pay their fair share on their new income -- particularly when all other earners, including minimum wage workers, pay taxes on the very first dollar they earn. To discuss whether to increase the size of estates exempted from taxation to $3 million, $10 million, or to make it unlimited is to move in the wrong direction in a society that values hard work. The current favorable treatment of inherited versus earned income is the opposite of what it should be.

A far better approach would be to tax people equivalently on all the income they receive, whether it be from earned or inherited income, by replacing the estate tax with an income tax on inheritances. Under such a tax, inheritances would be treated the same as other forms of earned income and taxed in the same manner.

Whereas under an estate tax, the tax owed is based on the size of the estate regardless of how it is distributed, under an inheritance tax, how much an individual inherits along with their economic circumstances would be considered. The result would be much fairer. The housekeeper and the wealthy niece who each receive a $50,000 windfall would pay taxes based on their own different tax rates. Likewise, two middle-class workers, one of whom inherits $10,000 and another who inherits $1,000,000, would be taxed at the rates that apply to their total income.

Changing from an estate tax to an inheritance tax would not only be fairer, it would be better tax policy. A general objective of tax policy is to create the broadest base with the lowest possible rates to minimize economic harm. Under the inheritance tax, the base would be significantly broadened by taxing all inheritances (except for, say, those less than $10,000) rather than narrowed as under the proposed estate tax compromises. At the same time, the estate tax rate, which ran as high as 55%, would be lowered significantly to current income tax rates, which range from 0% to 35%.

And creating an inheritance tax rather than eliminating the estate tax would save the Treasury hundreds of billions of dollars at a time when it desperately needs the money.

This argument does have an appeal to me in that it treats an inheritance as earnings - new money in your pocket, and new money means a new tax to you.

Estate Tax Repeal - Off Again, On Again, On Hold Again

Category: Estate and Inheritance Tax

The on-again, off-again, on-again saga of federal estate tax repeal, is on hold again. Bloomberg.com reports in part:

"Senate Majority Leader Bill Frist postponed a vote on a measure to exempt most multimillionaires from federal estate taxes after conceding Republicans lack the votes to pass legislation adopted by the House last week.

The delay is the third since Frist began his quest to repeal or reduce the tax last year and the second time this month his ambitions were thwarted by Democrats who say the government needs the revenue generated by the tax. The House passed the legislation 269-156 on June 22 after Frist urged it to act before the Independence Day recess next week.

[Senator John] Kyl said Senate Republicans are determined to pass the legislation this year, though they want to ensure they have the 60 votes needed to withstand a challenge by Democrats. Republicans control 55 seats in the chamber; 60 votes are required to overcome filibusters, the legislative maneuvers that can kill legislation.

House Measure

The House legislation would spare all but about 2,800 multimillion-dollar estates from federal tax by exempting the first $10 million of a couple's estate from any tax. Estates valued between $10 million and $25 million would be taxed at the capital-gains rate, while estates of more than $25 million would be taxed at top rates of 30 percent to 40 percent.

The measure, which would take effect in 2010, also includes a tax break for timber companies intended to lure Senate Democrats from timber-producing states such as Washington, Arkansas, and Louisiana.

The measure, characterized as a take-it-or-leave-it offer by House Ways and Means Committee Chairman Bill Thomas, a California Republican, has had a lukewarm reception in the Senate.

2,800 Estates

Under current law, 12,600 estates -- or less than 1 percent of all people who die -- will be subject to the tax this year, according to estimates by the Tax Policy Center, a non-partisan research institution in Washington. The center estimated that a plan similar to Thomas's would reduce the number of taxable estates to 2,800 and would cut their tax rate to as low as 15 percent from about 45 percent.

The legislation also repeals a federal deduction for tax payments to the 23 states that retain their own estate or inheritance taxes, including Washington, Tennessee, Ohio, New York, New Jersey and Connecticut. That would subject residents of those states with large estates to double taxation, said Harley Duncan, executive director of the Federation of Tax Administrators, a Washington-based association of state tax officials. "

New Life for Estate Tax "Reform"?

Category: Estate and Inheritance Tax

Ah, politics and pork. One of my least favorite things about the political process is the institutionalized blackmail of slipping a legislative item that has nothing to do with a package of legislation into said package, and saying "I vote 'yes' if you keep my item, or 'no' if you don't". This is how the pork gets into the package.

In keeping with this fine tradition, elderlawanswers.com and other sources have indicated that the Republicans who lost the estate tax repeal vote earlier this month may try it again by putting the repeal legislation in a pending pension reform package.

Estate Tax Changes May Be Slipped Into Pension Legislation - Elder Law Answers Articles: "Republican lawmakers, who so far have been unable to win Senate approval of either full estate tax repeal or a significant reduction in the tax that wealthy heirs pay, are now considering another tactic: slipping estate tax 'reform' into a pension bill now in a House-Senate conference committee.

The pension legislation, H.R. 2830, which seeks to put the nation's defined benefit pension plans on a sounder footing, is being finalized by a conference committee reconciling different House and Senate versions.

The 'primary advocate' for attaching estate tax reform to the pension bill, according to the National Underwriter, an insurance industry publication, is Sen. Trent Lott (R-MS). Lott said he doubts that a deal on reducing the estate tax can emerge in the Senate, and so is viewing the pension bill conference report as an alternative vehicle."

News - Estate Tax Repeal Defeated, Compromise Package Up

Category: Estate and Inheritance Tax

Category: Estate and Inheritance Tax

From Bloomberg.com:

The U.S. Senate voted to block a repeal of the federal tax on multimillion dollar estates, dealing a setback to Republicans and the Bush administration.

The Republican proposal failed to clear the 60-vote threshold necessary to overcome a procedural hurdle. The 57-41 vote ends for now the hopes of opponents that the levy, dubbed a ``death tax'' by Republicans, will be permanently repealed.
Senate Minority Leader Harry Reid, a Nevada Democrat, said Republicans were focusing on a tax that affects less than 1 percent of the population while ignoring higher priority items such as gas prices, uninsured workers, a rising national debt, and an outdated minimum wage.

``The estate tax is not high on the agenda of people in Nevada,'' he said. ``I think we're wasting precious days.''

The Senate was the last hurdle for groups that have lobbied for repealing the estate tax for more than a decade. The House of Representatives voted 272-162 in April 2005 to repeal the tax on a permanent basis, and the Bush administration says it wants to abolish the levy. The Senate fell six votes short of repealing the tax permanently in 2002.

An alternative approach championed by Republican Senator Jon Kyl and Finance Committee Chairman Charles Grassley would only tax estates valued at more than $10 million at rates of between 15 percent and 30 percent.

Reid, a Nevada Democrat, said the alternative proposal is an ``absolute farce'' because it would still spare wealthy decedents from paying up to 90 percent of the estate taxes they would otherwise owe. ``Someone who is worth $30 million net -- that's a lot of money -- they would be paying less taxes than someone who works at a plant in Henderson, Nevada,'' Reid said.

Estate Tax Repeal - Windfall Oil Company Execs and Cabinet Members

Category: Estate and Inheritance Tax


While obviously partisan, an interesting report from US Representative Henry A. Waxman, Ranking Member, Committee on Government Reform, and the Committee on Government Reform Minority Office. It is a numerical look at who (naming names) might benefit from a total repeal of the estate tax. It caught my eye in that the report is entitled "New Report Reveals Estate Tax Repeal Would Give Over $200 Million Windfall to Oil Company Executives" given that I am spending $3.00 at the pump these days (and thus not feeling particularly inclined to "give" any more to the oil industry).

Tuesday, May 30, 2006 -- Next week the Senate is scheduled to consider legislation (H.R. 8) to repeal the estate tax. Repealing the tax, which has been law since 1916, is estimated to cost $1 trillion from 2011-2021. Although the tax affects few Americans, repeal will give some families extraordinary windfalls. The CEO's of major oil companies, for instance, would get enormous benefits if H.R. 8 were enacted. The family of one oil executive, Lee Raymond (the former ExxonMobil CEO), alone could receive a tax break worth over $160 million.

This report analyzes the impact that repeal would have on the families of the senior executives for the major oil companies. In 2005, the minority staff of the Government Reform Committee released a similar analysis showing that repealing the estate tax repeal would save the President, Vice President, and 11 cabinet members as much as $344 million.

Estimated Estate Tax Savings of Oil Company CEOs

2005 Analysis: Estimated Tax Savings of Bush Cabinet

An Educated Public Prefers Keeping or Reforming the Estate Tax

Category: Estate and Inheritance Tax

From Juan Antunez, Esq. at The Florida Probate Litigation Blog:

New Poll Shows 57% Prefer Keeping or Reforming the Estate Tax:
"New Poll Shows 57% Prefer Keeping or Reforming the Estate Tax

As the Senate prepares for a May vote on estate tax repeal, increased budget deficits and a more educated public are spurring greater numbers to join a movement begun by some of America's millionaires in 2001 to keep the federal estate tax. A new national poll shows that 57% prefer keeping the tax as is or reforming it. Only 23% favor repealing the tax. The number favoring preservation or reform rises to 68% when respondents learn more information about the estate tax, with 23% again favoring repeal.

For more facts and figures related to estate tax repeal, see here."

To become more educated about the role of the estate tax, see my prior post Truths About the Estate Tax - Debunking the Popular Myths, putting to rest some of the bad facts popularized about the estate tax .

Truths about the Estate Tax - Debunking the Popular Myths

Category: Estate and Inheritance Tax

In yesterday's post, Who Wants Estate Tax Repeal - The Uber-Rich Lobby (98%+ chance you aren't one of them) I highlighted a new report from Public Citizen and United for a Fair Economy that demonstrated how "18 families worth a total of $185.5 billion have financed and coordinated a 10-year effort to repeal the estate tax, a move that would collectively net them a windfall of $71.6 billion."

In the report entitled "Spending Millions to Save Billions - The Campaign of the Super Wealthy to Kill the Estate Tax" Public Citizen's Congress Watch and United for a Fair Economy explore and refute some common myths about the estate tax. These myths are just plain wrong "facts" that many believe to be gospel truth about the estate tax, but are, in real fact, just plain wrong. I thought the report did such an excellent job of educating readers about the true role of the estate tax, that wanted to highlight some of the information here. This is a long post, but it gets to the heart of the matter of the estate tax. The education it provides is worth scrolling down for.

From entitled "Spending Millions to Save Billions - The Campaign of the Super Wealthy to Kill the Estate Tax" (footnotes removed):

Myth: The Estate Tax Forces Families to Sell their Farms
Several years of investigative journalism articles and congressional reports have made it clear that the notion of any farm being destroyed by the estate tax is a myth. In 2001, the pro-repeal American Farm Bureau could not provide the New York Times with a single example of a farm having been sold to pay the estate taxes. A 2005 report by the Congressional Budget Office found that at the current exemption level of $2 million, very few family farms would owe an estate tax. If the $2 million threshold existed in 2000, as many reform proposals would have allowed, only 123 farms in the entire country would have owed estate taxes that year. The CBO study also found that among the very few that would owe taxes, the vast majority would have sufficient liquid assets (savings, investments and insurance) to pay the taxes without having to sell off any farm assets. For example, at the $2 million threshold, only 15 of the farms would have had insufficient liquid assets to pay.

Myth: The Estate Tax Destroys Family Businesses
Like the allegations about family farms, the notion that the estate tax forces family-owned enterprises out of business is equally fallacious.

Of the 2.5 million people who died in 2004, only 440 left a taxable estate with farm or business assets equal to at least half the total estate, according to the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, and 210 of these owed less than $100,000.

Myth: Estate Tax is Double Taxation
Advocates of estate tax repeal claim that the estate tax is unfair because it taxes the same money twice: once when it is earned as income and again as part of an estate. But this reflects a misunderstanding of the tax structure and of what is actually taxed in most estates.

Money in our society is frequently taxed upon transfer, so the same dollar is often taxed more than once.

The reality is that the bulk of wealth in large taxable estates has never been taxed at all. This is wealth in the form of appreciated property, stocks, and bonds that have increased in value since they were acquired or inherited - and have never been taxed. Without an estate tax, billions of dollars of untaxed capital gains would pass within wealthy families without any tax.

In estates with assets over $10 million, over 56 percent of the wealth takes the form of appreciated property, stocks and bonds. As estate tax wealth exemptions rise, the tax will increasingly be levied on estates with higher percentages of appreciated property that has not been taxed.

Myth: It Costs More to Comply with the Estate Tax than the Revenue It Raises
Compliance costs include both the cost to the IRS of administering the tax and the personal costs of preparing tax returns, planning for the tax, and administering an estate.221 A 1999 study by two professors at Rutgers University concluded that the cost of estate tax compliance ranges from 6 to 9 percent of estate tax revenues. This is consistent with other forms of taxation, including the federal income tax. "The costs of administering the estate tax have been grossly overstated. We do not know why,"they wrote. "Instead of high cost, we find the estate tax to be an efficient tax."

About half the costs associated with estate taxation would remain even if the tax were repealed. Researchers Joel Friedman and Ruth Carlitz observe "activities such as selecting executors and trustees, drafting provisions and documents for the disposition of property, and allocating bequests among family members would still have to be undertaken in the absence of an estate tax."

Repeal advocates continue to propagate myths about costs of administering the estate tax. The Policy and Taxation Group's Center on Taxation and Policy publishes a list of "Reasons the Death Tax Does Not Work," which asserts that "it collects just 1 percent of the nation's revenues, and dollar for dollar, it costs as much to collect death taxes as it raises." Seattle Times publisher Frank Blethen, patriarch of the family that owns a majority interest in the Seattle Times Co., used his deathtax.com Web site to claim, falsely, that "it costs the government 65 cents of every dollar raised for enforcement and compliance."

Myth: The Super Wealthy Avoid the Estate Tax
There is a myth that the estate tax is "voluntary" for the super wealthy and that the people who pay the estate tax have small estates and less resources to hire planners. It is true that doing estate tax planning - such as planned giving to heirs - can reduce one's tax bill. This favors estates with greater liquidity of wealth.

But the super wealthy do pay significant estate taxes, under current law. In 2004, the 520 largest estates - those valued at over $20 million - paid a net average tax of $10.8 million each.

There are only three ways that super wealthy individuals can entirely avoid paying estate taxes at death;
* Pass all wealth above the given year's exemption level to one's spouse, taking advantage of the unlimited marital deduction;
* Give all wealth above the given year's exemption level to charity, thereby reducing one's estate; or
* Die in 2010, the only year that the estate tax is currently scheduled to be repealed.

Some people purchase life insurance in an amount sufficient to pay their estate taxes when they
die. This doesn't enable them to avoid the tax but, in essence, to pre-pay it through insurance premiums. This effectively shields heirs from having their inheritances reduced by the amount of estate taxes, while still providing for the tax itself to be paid in full.

Myth: The Estate Tax is Confiscatory Because it Takes over Half of Someone’s Estate
The top marginal estate tax rate in 2006 is 46 percent. In 2009 it will be 45 percent. But this rate applies only to amounts that do not go to a spouse or charity and that exceed the exemption. In 2006, only amounts higher than $2 million for an individual or $4 million for a couple will be taxed at that rate, and that's if no other spousal or charitable provision has been made. Therefore, a substantial portion of most estates is passed on untaxed.

According to IRS data, the "effective" rate - the percentage of estates that is actually paid in taxes - averaged about 19 percent in 2003, a year in which the top rate was 49 percent.

Who Wants Estate Tax Repeal - The Uber-Rich Lobby (98%+ chance you aren't one of them)

Category: Estate and Inheritance Tax

Less then 2% of all American's pay any estate tax (see prior post Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper). So why all the hullabaloo? Well, according to recent publications, its due in large part to lobbying by the wealthiest families in the county (think here the owners of Wal-Mart).

From Public Citizen and United for a Fair Economy

WASHINGTON, D.C. The multimillion-dollar lobbying effort to repeal the federal estate tax has been aggressively led by 18 super-wealthy families, according to a report released today by Public Citizen and United for a Fair Economy at a press conference in Washington, D.C. The report details for the first time the vast money, influence and deceptive marketing techniques behind the rhetoric in the campaign to repeal the tax.

It reveals how 18 families worth a total of $185.5 billion have financed and coordinated a 10-year effort to repeal the estate tax, a move that would collectively net them a windfall of $71.6 billion.

The report profiles the families and their businesses, which include the families behind Wal-Mart, Gallo wine, Campbell's soup, and Mars Inc., maker of M&Ms. Collectively, the list includes the first- and third-largest privately held companies in the United States, the richest family in Alabama and the world's largest retailer.

These families have sought to keep their activities anonymous by using associations to represent them and by forming a massive coalition of business and trade associations dedicated to pushing for estate tax repeal. The report details the groups they have hidden behind the trade associations they have used, the lobbyists they have hired, and the anti-estate tax political action committees, 527s and organizations to which they have donated heavily.

In a massive public relations campaign, the families have also misled the country by giving the mistaken impression that the estate tax affects most Americans. In particular, they have used small businesses and family farms as poster children for repeal, saying that the estate tax destroys both of these groups. But just more than one-fourth of one percent of all estates will owe any estate taxes in 2006. And the American Farm Bureau, a member of the anti-estate tax coalition, was unable when asked by The New York Times to cite a single example of a family being forced to sell its farm because of estate tax liability. [again, see prior post Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper in which the CBO confirms this].

"This report exposes one of the biggest con jobs in recent history," said Joan Claybrook, president of Public Citizen. "This long-running, secretive campaign funded by some of the country's wealthiest families has relied on deception to bamboozle the public not only about who must pay the estate tax, but about how repealing it will affect the country."

Click here for the entire article, including a statement by Paul Newman that "For those of us lucky enough to be born in this country and to have flourished here, the estate tax is a reasonable and appropriate way to return something to the common good. I'm proud to be among those supporting preservation of this tax, which is one of the fairest taxes we have."

Death, Taxes, and Bush Budget Proposal

Category: Estate and Inheritance Tax

"The President aims to end estate taxes for the wealthiest Americans. He also wants to scrap a $255 death benefit for the poorest"

In a not unbiased article, Death, Taxes, and George W. Bush, a brief outline of the budget proposal that will effect the cost of dying in America. (There is also a nifty reader comment section that gives voice to a variety of opinions).

President Bush and his administration have been anglign to kill the so-called death tax since they were first elected into office. In prior posts (Only .5% of US Estimated to Pay Estate Tax (and other op-eds for reform, Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper ) , I have questioned the emotional and economic elements of this proposal. While eliminating a tax can be something to cheer about, New Jersey and New York residents need to bear in mind that each state will continue to impose its own estate tax outside of and federal estate tax.

As to the Social Security death benefit, it is little known and a small amount. The article describes the issue around repeal of it as follows:

"According to the Bush budget, the benefit would be eliminated "because it no longer provides a meaningful monetary benefit for survivors yet requires significant administrative resources." The Social Security Administration estimates that eliminating the benefit would save the government about $190 million next year.

A spokesman says the benefit has not been increased since 1954 and "no longer bears a relationship to funeral costs.""

However, the death benefit is a real benefit to the person who was relying on social security, and whose last check was just automatically withdrawn as you need to survive the month to earn your social security - the payment for the month you die must be returned.

It is sure that the debate will rage on.

Gov. Pataki Pledges To Eliminate New York Estate Tax

Category: Estate and Inheritance Tax

Pataki Pledges To Cut Taxes, Reliance on Oil - January 5, 2006 - The New York Sun - NY Newspaper: "Entering his final year in office, Governor Pataki yesterday pledged to cut an array of state taxes..."

Included in the proposed tax cuts will be the elimination of the the New York estate tax.

Currently, the New York estate tax is "de-coupled" from the federal estate tax tax. The federal estate tax allows a $2 million exemption per person, while New York only allows a $1 million exemption. The calculation of the New York estate tax is similar to the calculation of the federal estate tax, as the New York estate tax relies on the Federal estate tax laws in effect in 2002. Elimination of the New York estate tax would have a huge impact on the strucutre of estate plans of New York residents, and would also likely encourge New York retirees to remain New York residents instead of changing residence to Florida or another state that does not have a state level estate tax.

Beware the Snare - State Estate Tax on the Rise

Category: Estate and Inheritance Tax

Rejoice! It is almost 2006, and the federal estate tax exemption will increase from $1.5 million to $2.0 million per person - that is $4.0 per married couple with a tax advantaged estate plan. Hooray! No more taxes! ....

But wait - this is the Federal exemption from estate taxes. What about the State where you live (or own real estate)? 24 States and the District of Columbia have a State level death taxes - which are imposed by the State taxing authority, not the Federal government. Depending on the tax rates imposed by each State, your total "death tax" bill may be going up in 2006, not down.

While the Federal Exemption for Estate tax is $2.0 million, many states have a lower exemption level (including both New Jersey and New York):

If your State is not on this list, should State Estate Taxes still be a concern for you? Yes, if you own real property in any State on these lists. Real property is subject to the estate tax laws of the State in which it is located; all other property is subject to the estate tax laws of the State in which you reside.

$2 Million State Death Tax Exemption:

• Connecticut
• Washington

$1 Million State Death Tax Exemption:

• District of Columbia
• Kansas
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oklahoma
• Oregon
• Tennessee

$675,000 State Death Tax Exemption:

• New Jersey
• Rhode Island
• Wisconsin

Other State Death Tax Exemptions:

• Indiana ($100,000 per beneficiary)
• Nebraska ($10,000 per beneficiary)
• Ohio ($338,333)
• Pennsylvania ($3500 per household)

Thank you Mr. Binger - Single Estate Tax Payment = 1/7 Minnesota's Budget Surplus

Estate Planning, Estate and Inheritance Tax

The State of Minnesota got an unexpected boon this year - to the tune of an unanticipated state estate tax payment of $112 million (note this is just the estate tax payment to Minnesota; the federal estate tax payment would be separate and above). This payment alone put the state into surplus territory for the year - The estate tax payment is so large it equals one-seventh of the state's projected 2006-07 budget surplus of $701 million.

The who's, how's and why's of the situation are sketched below and detailed by the Minneapolis St. Paul Star Tribune:

Who: James Binger, former chairman of Honeywell, theater entrepreneur and onetime part owner of the football Vikings, who died in November 2004 at age 88.

How: Apparently, Mr. Binger intended to be charitably generous with his estate, but to focus on end-of-life medical research, not to necessarily benefit the State. Shortly before his death he changed a $200 million bequest from a private foundation to a long-time business associate and friend.

Why: A private foundation creates a tax deduction; a friend creates a tax liability. The last minute will modification changed his charitable beneficiary from the foundation to the State of Minnesota - whose residence should give thanks to Mr. Binger for his unexpected holiday gift.

Post-Mortem Planning Taken Too Far - False Estate Tax Return = Jail Time

Category: Estate and Inheritance Tax

Filing a false estate tax return can land you in jail.

From OA Online News, an Odessa Texas attorney, Stephen C. Ashley, took the idea of post-mortem planning in his father's estate a little too far when he created backdated gift deeds falsely reflecting that his father had deeded some of his ranch to his sons before he died, having them falsely executed and notarized.

"�We all own the responsibility to deal with the government honestly,� [Assistant U.S. Attorney John S.] Klassen said. [U.S. District Judge Robert] Junell then sentenced Ashley to two concurrent two-year prison terms for filing a false U.S. Estate Tax Return and unlawfully conspiring to defraud the IRS in its efforts to collect estate taxes. "

Special Use Valuation for Certain Real Estate in an Estate - IRC Section 2032A

Category: Estate and Inheritance Tax

An oft heard criticism of the estate tax is that it unfairly targets farmers and small business, where significant wealth may be being transferred to an heir, but in a form that is highly illiquid, thus giving rise to cries that "the kids have to sell the farm to pay the taxes."

As a caveat, with a little forethought, plans can be put into place to create liquidity at death. However, even for those who fail to plan, the IRC offers additional tax breaks through IRS Section 2032A, Special Use Valuation of Certain Farms and Real Estate, discussed here, and IRC Section, 6166, Installment Payments, a post for another day.

IRS Section 2032A allows qualified farm property to be valued at less then its fair market value if the following conditions apply:

IRC Section 2032A allows an alternate valuation for certain farm and closely held business real property. Real property may qualify for Section 2032A if:

1. Decedent was a US citizen or resident at the time of death;
2. The real property is located in the US;
3. At decedentÂ’s death, the real property was used by the decedent or a family member for farming or a trader business, or was rented by such use by either the surviving spouse for the lineal descendent of the decedent to a family member on a net cash basis;
4. The real property was acquired from or passed from a decedent to a qualified heir of the decedent;
5. The real property was owned and used in a qualified manner by the decedent or a member of the decedentÂ’s family during five (5) of the last eight (8) years before the decedentÂ’s death;
6. There was a material participation by the decedent or a member of the decedentÂ’s family during five (5) of the last eight (8) years before the decedentÂ’s death; and
7. The qualified property meets the certain percentage requirements:
a. At least fifty percent (50%) of the adjusted value of the gross estate must consist the adjusted value of the real or personal property that was being used as a farm or in a closely held business and that it was acquired, or passed from, the decedent to a qualified heir of the decedent; and
b. At least twenty-five percent (25%) of the adjusted value of the gross estate must consist of an adjusted value of the qualified farm or closely held business real property.

If you don't despair, IRC Section 6166 may take the sting out of the estate tax by allowing payments on the farm property to be deferred for up to 10 years under an installment payment plan.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

Category: Estate and Inheritance Tax, Tax Law and Planning

From the IRS, a quick summary of some inflation adjustments to 2006 tax planning. Revenue Procedure 2005-70 contains a complete list of all 2006 inflation adjustments.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

WASHINGTON - Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.

The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.

The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Form 706 for 2005 Published - New Form shows new State Death Tax Deduction

Category: Estate and Inheritance Tax, Probate and Estate Administration

At long last the Form 706 - Federal Estate Tax Return - for decedents dying in 2005 has been released by the IRS. The form adds a new Line 3b for the "State Death Tax Deduction", recognizing the change from a State Death Tax Credit to a Deduction for State Death Taxes paid.

The Form 706 Instructions set forth how to claim the new Deduction as follows:


"The estates of decedents dying after 12/31/2004 will be allowed a deduction for state death taxes, instead of a credit. Beginning in 2005, the state death tax credit is repealed. You may take a deduction on line 3b for estate, inheritance, legacy, or succession taxes paid as the result of the decedent’s death to any state or the District of Columbia. You may claim an anticipated amount of deduction and figure the federal estate tax on the return before the state death taxes have been paid. However, the deduction cannot be finally allowedunlesss you pay the state death taxes and claim the deduction within 4 years after the return is filed, or later (see section 2058(b)) if:

1. A petition is filed with the Tax Court of the United States,
or
2. You file a claim for refund or credit of an overpayment which extends the deadline for claiming the deduction.

Note. The deduction is subject to no dollar limits.

If you make a section 6166 election to pay the federal estate tax in installments and make a similar election to pay the state death tax in installments, see section 2058(b) for exceptions and periods of limitation.

If you transfer property other than cash to the state in payment of state inheritance taxes, the amount you may claim as a deduction is the lesser of the state inheritance tax liability discharged or the fair market value of the property on the date of the transfer. For more information on the application of such transfers, see the principles discussed in Rev. Rul. 86-117, 1986-2 C.B. 157, prior to the repeal of section 2011.

You should send the following evidence to the IRS:

1. Certificate of the proper officer of the taxing state, or the District of Columbia, showing the:
a. Total amount of tax imposed (before adding interest and penalties and before allowing discount),
b. Amount of discount allowed,
c. Amount of penalties and interest imposed or charged,
d. Total amount actually paid in cash, and
e. Date of payment.

2. Any additional proof the IRS specifically requests."

Annual Gift Tax Exclusion rising to $12,000 in 2006

Category: Estate Planning, Estate and Inheritance Tax

The amount that you can give to a person without using any of your lifetime annual exclusion will increase from $11,000 to $12,000 in 2006. Between a couple, they will be able to give away $24,000 to any person with no gift tax consequences. This increase will obviously increase the effectively of any estate tax minimization strategies such as an insurance trust; children's or grandchildren's trusts; family limited partnership or family LLC transfers; etc.

Savings Bonds (Part 2) - What Happens when the Bond Owner Dies?

Category: Estate and Inheritance Tax, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Savings bonds are a ubiquitous asset. However, dealing with savings bonds as part of an estate can in many ways be more complicated then dealing with other investment assets, such as mutual funds, stocks and bonds, where a broker can coordinate transfer and liquidation efforts. In a prior post Saving Bonds (Part 1) - Learning More about those Bonds - I discussed resources to learn more about the value of any bonds. Here, we are looking at what to do with the bonds as part of an estate, or if you inherit bonds as a result of a person's death.

A few general rules, regardless of what series of bonds (E/EE, H/HH or I):

• Single Ownership: If the savings bonds are owned by one person, and that person dies, the bonds are now owned by the person's estate. The executor, personal representative, or administrator, as the case may be, is the only person authorized to deal with the bonds after a person's death. This means that a probate proceeding will need to be opened so that a person is named by the court to liquidate or transfer title to the bonds.
  
  
• Joint Ownership: If the bonds have co-owners, and one owner dies, the bond now belongs entirely to the co-owner. The co-owner may now liquidate the bond, change title to his or her own name, or change title to the surviving owner and another person of the owner's choosing.
  
  
• Named Beneficiary: If the bond owner named a beneficiary to the bonds on the bonds (not through her will) then upon the bond owner's death, the bond ownership is automatically transferred to the beneficiary. The named beneficiary may now liquidate the bond, change title to his or her own name, or change title to the named beneficiary and another person of the beneficiary's choosing.
  
  
• Estate Tax Consequences: Where the bonds are owned by one person (or by one person who names a beneficiary), 100% of the value of the bonds as of date of death is includible in a person's taxable estate. Where the bonds are owned by more then one person, there is a presumption that 100% of the value of the bonds is includible in the taxable estate of the first person to die. This presumption can be rebutted if the surviving co-owner actually contributed money to buy the bonds. The more likely scenario is that grandma bought a bond naming grandchild as co-owner with grandma's money. In this situation, 100% of the value of the bond on the date of grandma's death is included in her estate, even though she had a co-owner.
  
  
• Income Tax Consequences: Interest income on bonds is generally reported only when the bonds are cashed, disposed of (note: a change of ownership is considered a "disposition" of the bonds and interest accrued to that date must be reported at that time), or reach final maturity. Unlike other types of investments, there is no "step up in basis" for savings bonds, and the accrued, but as yet untaxed income, must be reported as some point by the estate or the beneficiaries.
  
  If a person owned bonds in their own name with no beneficiary, reporting the interest on those bonds for federal income tax purposes is the responsibility of either (a) the estate if the executor, personal representative, or administrator as the case may be, redeems the bonds; or (b) the beneficiaries of the estate if the bonds are transferred to them as new owners, in the year in which they redeem bonds or the bonds reach final maturity.
  
  Where there is a co-owner or beneficiary named, the co-owner or beneficiary is the new owner and as such is required to include on his or her return interest earned on the bonds for the year the bonds are redeemed or disposed of (including re-registration by substituting a new owner for the original living owner) or the bonds reach final maturity, whichever occurs first. Alternatively, even when there is a surviving co-owner or beneficiary, the person filing the decedent's final 1040 has the option of reporting on that return all interest earned on the bonds to the date of death. This option might be used where a person on a low income tax bracket has died, leaving the bonds to a person in a higher tax bracket.

The Bureau of Public Debt, on the Treasury Direct website, has detailed articles specifically outlining how savings bonds are to be treated in the event of the death of a bond holder.

• Series EE/E - What To Do When a Bond Owner Has Died
  
• Series HH/H - What To Do When a Bond Owner Has Died
  
• Series I - I Bond(s) Owners Deceased
  

New Priorities - Estate Tax Legislation on hold

Category: Estate and Inheritance Tax

I have been away for a week that has seen devastation and destruction, as well as the passing of a brilliant jurist. Those things that were a priority 10 days ago now pale in comparison to real issue of life, death, health and welfare.

Congress's agenda reflects this change. Senate Majority Leader Bill Frist, R-Tenn., has indicated that much of the planned items of the agenda, including legislation on the estate tax, are now on hold.

The destruction of the Gulf States has given rise to many questions and concerns, which unfortunately have been overshadowing acts of heroism, community and graciousness. Take an opportunity to not just think, but act. Go to the American Red Cross and give what you can to help those who have lost family, homes, possessions, jobs, and all sense of security. And remember to count your blessings and value your real priorities.

Chart: Only .5% of US Estimated to Pay Estate Tax (and other op-eds for reform)

Category: Estate and Inheritance Tax

September 6 is when Congress comes back to take up the question of repeal of the Estate Tax. A recent report from the Congressional Budget Office shows that for all its publicity as the killer of small business, the federal estate tax impacts a miniscule portion of the population (see recent Y&Y post). From all my reading, my position is neither for or against repeal - instead, I question in what manner the lost revenue will be made up? One thing is for sure - the government needs money to operate, it currently doesn't have enough, and at some point the tax will be coming to all of us to make up the difference. If not through the estate tax, fine; but don't kid yourselves into thinking that when the dollars brought in through the estate tax go away that the need for those dollars will also go away.

Two recent op-eds questioning the need for repeal:

Death Tax? Double Tax? For Most, It's No Tax - New York Times


"A report last month by the Congressional Budget Office found that in 2000 only 2 percent of all estates - about 52,000 - were subject to any estate tax. At that point, taxes were imposed only on estates worth $675,000 or more. The limit rose to $1.5 million in 2004, and if that limit had been in effect in 2000, only 13,771 estates - fewer than 1 percent - would have been subject to the tax. All but 740 of them would have had enough in liquid assets to cover estate tax liabilities, the office estimated."







Fix Estate Tax, Don't Gut It - Wisconsin State Journal


"The federal estate tax ought to be reformed, but the super-rich should not get off virtually tax-free. That's why the Senate should adjust its aim as it works on a compromise reform plan."

Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper

Category: Estate and Inheritance Tax,

The Congressional Budget Office (the "CBO") is a non-partisan entity charged with providing Congress with objective analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process.

The CBO has just issued a new paper, Effects of the Federal Estate Tax on Farms and Small Businesses (a .pdf link). As a non-partisan entity, the CBO does not make recommendations; instead, in analysis actual information, sans spin.

Whether you support or oppose the repeal of the federal estate tax, I find it interesting that the claim that "the death tax is killing America's small businesses and farms" is so widespread, when the actual impact of the estate tax on those same small businesses and farms is so minimal (e.g.: between 1999 and 2000 a TOTAL of 302 actually could have been negatively impacted by the claim that the "death tax kills small business".)

Some facts culled from the paper:

• "In recent years, fewer than 2 percent of all estates have
  had to pay estate taxes.
  
  "CBO's analysis examined data from estate tax returns filed in 1999 and 2000
  (the most recent data available when the analysis was conducted). Determining from tax returns what constitutes a family farm or small business is difficult, however...For lack of better identifiers, this analysis considered the estates of farmers to be those reporting an occupation of either farmer or farm worker (about 4,500 estates per year) and the estates of small business owners to be those claiming the QFOBI deduction (about 1,500 per year)." [Note: So, the total persons possibly impacted by the estate tax out of the entire United States population in this two year period is 6000.]
  
  
• "The vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed. However, estates involving farms or small businesses were less likely than the average estate to have sufficient liquid assets to cover their estate taxes. In 2000, about 8 percent (or 138) of the estates of farmers who left enough assets to owe estate taxes faced a tax payment that exceeded their liquid assets, compared with about 5 percent of all estates that owed taxes. For estates claiming the QFOBI deduction, the corresponding figure was about 34 percent (or 164 estates). Those numbers are upper bounds, however, because the definition of liquid assets used on estate tax returns excludes
  some money held in trusts, which could also be used to pay estate taxes.: [Note: So the maximum number of people who possibly could have had to sell the family business to pay taxes is 302.]
  
  "For returns filed in 2000, the threshold for filing was gross assets worth at least $650,000 or $675,000, depending on the year of death—less than half the 2005 level of $1.5 million. Had the current filing threshold been in effect in 2000, far fewer estates, especially those of farmers, would have had to file estate tax returns."
  

The balance of the paper is an excellent summary of the history of the estate tax, a numerical analysis of its impact on the 302 families described above, as well as analysis of the impact of repealing the tax versus raising exemptions. While it is fair to note that much of the study is by nature subjective (does the existence of an estate tax suppress entrepreneurialship?), the balance of the study definitely suggests that the public belief that the "death tax kills small business" is blown way out of proportion.

Federal Estate Tax Compromise Solutions - One opinion from the NY Times

<Category: Estate and Inheritance Tax

A New York Time editorial dated August 8, 2005 entitled The State of the Estate Tax highlights issues in the current estate tax repeal to date. The editorial takes the position that in an era of huge federal deficits, a total repeal of the federal estate tax would be unlikely. The editorial goes on to describe how the US Senate plans to take up the debate on the repeal of the federal estate tax when they return from summer break in September, and focuses on a critique of the compromise solution offered by Sen. Jon Kyl of Arizona (Republican).

Mr. Kyl's approach is two-fold:

• An increased personal exemption from federal estate tax to $3.5 million (which would in effect be $7 million per married couple).
  
  The editorial states that "With an exemption of $3.5 million, only the top 0.3 percent of estates would be subject to the tax. Huge estates are precisely those that should be taxed most heavily, because the larger the estate, the more likely it is to be made up of investment gains that were never taxed during the owner's lifetime."
  
  This comment refers to the little publicized fact about the "step-up in basis" available at death. Under Section 1014 of the Code, when a person dies, their heirs receive a "stepped-up" basis in inherited assets (with some key exceptions, such as retirement plan assets). The heirs' basis is the fair market value of the assets on the date of death (ie: the basis is "stepped-up" in value to the fair market value). Section 1014 thereby effectively wipes out any tax on unrealized appreciation during the person's lifetime. In this light, it can be argued that the estate tax acts in lieu of the capital gains tax.
  
  
• A reduction in the estate tax rate to 15%, to make it equivalent to the capital gains tax rate. In the limited context of describing the purpose of the estate tax as replacement to the capital gains tax, this makes sense. However, the editorial goes on to point out that:
  
  
  "Mr. Kyl contends that a 15 percent estate tax rate is fair, because it is the same as the capital gains tax rate that is applied to investment profits during one's lifetime. That's a false comparison. The capital gains tax law does not allow you to exempt a huge portion of your profits before the tax rate is applied. The estate tax law does. Once the $3.5 million exemption and other deductions were factored in, a 15 percent tax rate would translate into a mere 6 percent levy on a $20 million estate."
  
  
  Another concern with describing the estate tax as replacement to the capital gains tax is that it oversimplifies the role of the estate tax. There are other theoretical underpinnings of the estate tax such as acting as a backstop to lower income tax rates during lifetime (allowing you to spend more during your life, and saving the timing of the tax until your death and basing it on what you did not spend during your life), as well a belief in a progressive tax system where the share of those with more dollars is greater.
  
  

The editorial misses another underlying benefit of Mr. Kyl's solution over outright repeal. If the federal estate tax were repealed, Section 1014 and the "step-up" in basis would no longer function in the relatively simple manner they do today. Under current law, your basis in inherited property in the fair market value at date of death. If an estate tax return is prepared, this is a simple matter of looking up the basis, even years later. If there is no federal estate tax, then Section 1014 would not wipe out unrealized gains during lifetime (subject to a blanket granting of basis under the law - ie: at death you can apply $1 million of basis to any estate assets, or something along those lines). This means that when you go to sell the inherited GM stock, you may need to figure out what the decedent paid for it - which will often be an impossible task. The result is that people may end up paying more capital gains tax then should be assessed if they cannot prove the basis of the assets sold. Most estate planners see this as a nightmare waiting to happen as people will need information that only a dead person may have. By keeping the federal estate tax, but tying it more closely with the capital gains tax, Mr. Kyl's proposal avoids the basis tracking issues.

Having said that, the estate tax repeal debate should really be stripped of all ideological underpinnings and approached from a practical and business-like manner. Fact: The estate tax brings in dollars today. Fact: The government needs those dollars to operate today - there is an astronomical federal deficit. Question: If the government no longer takes dollars from the estate tax, and given that it still needs those dollars to operate, how are those dollars being replaced? You can be sure the dollars will come from somewhere - just because the estate tax is repealed doesn't mean that taxes are repealed. These are the questions that need to weighed. From this approach, some people may find they prefer a tax that focuses on what you didn't spend before you died.

Vote on Estate Tax Repeal (a/k/a "The Paris Hilton Benefit Act") Postponed Until Fall

Category: Estate and Inheritance Tax

From Vote on Estate Tax Repeal Likely in Fall - Elder Law Answers Articles: "Senate Majority Leader Bill Frist (R-Tenn.) has postponed a vote on repeal of the estate tax until September, but lawmakers are likely to take up measure shortly upon returning from their August recess.

The Death Tax Repeal Permanency Act of 2005, which would repeal the estate tax permanently beginning in 2011, passed the House earlier this year by a 272-162 vote. However, Senate Republicans probably lack sufficient votes to block a Democratic filibuster of the measure, which its opponents have dubbed 'The Paris Hilton Benefit Act.'

The decision to delay the vote gives more time for compromise negotiations between Senate Finance Committee ranking minority member Max Baucus (D-Mont.), and Senate taxwriter Jon Kyl (R-AZ), according to Cowles Legal Systems.

Sen. Kyl has proposed a compromise that would make the estate tax rate equal to the capital gains rate, which is currently 15 percent, and exempt from taxation the first $3.5 million of an individual�s estate ($7 million per couple), with the exemption amount indexed to inflation in years after 2010. (Under current law, the per person exemption amount is $1.5 million in 2005, rising to $3.5 million in 2009.) The Center on Budget and Policy Priorities estimates that the Kyl proposal will cost the nation $595 billion between 2012 through 2021. Sen. Baucus has not yet presented an alternative proposal.

Repeal of the tax would mean that while the wealthiest Americans still cannot escape death, they will be able to avoid that other inevitability. The estate tax currently affects only the richest 1 percent among the deceased, those with inheritable estates worth more than $1.5 million. The Center on Budget and Policy Priorities estimates that after taking account of deductions an"

Federal Estate Tax Exemption to $2 million in 2006 - Effect on NJ Residents

Category: Estate Planning, Estate and Inheritance Tax

The Federal Estate Tax ("FET") Exemption amount is currently scheduled to increase from $1.5 million to $2.0 million on January 1, 2006. While Congress has a September agenda item to hammer out a permanent repeal of the FET, NJ residence should understand what impact the increasing FET exemption may have on them.

On one hand, a sign of relief can be made by those with more then $1.5 million in assets and less than $2.0 million ($3.0 million and $4.0 million for married couples with a properly planned estate) - FET will no longer be a worry. On the flip side, the New Jersey Estate Tax ("NJET") will play an even larger role. The Exemption from the NJET is frozen at $675,000. This means that only those estates valued at less than $675,000 escape estate taxation in New Jersey. In 2005, an estate of $1.5 million is exempt from FET, but owes NJET of $64,400. In 2006, an estate of $2.0 million will be exempt from FET, but owe NJET of $99,600.

There is no cap on the NJET. As your assets increase, so does the NJET. Also, the NJET does not depend on the FET. If there is no FET, a NJET will still be due and owing.

Many steps can be taken to reduce the bite of the NJET - including gifts, creating exemption trusts in the wills, life insurance planning, and more sophisticated techniques. Unfortunately, many New Jersey residents don't think ANY estate tax applies to them since their assets are below the exemption level for the FET. Or, they confuse the New Jersey inheritance ("NJIT"), which exempts lineal descendents and spouses from tax, from the NJET, which only exempts assets passing to spouses from taxation.

Many clients come to our offices thinking the NJET is not such a big deal - but starting 1/1/06, you can pay no FET and have to write a check to NJ for $99,600 - that is a lot of real money that could go to your family with proper planning instead of the State.