EDITOR'S NOTE: This article was originally published in the April 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.
Notice to anyone who has been using the uncertainty surrounding the federal estate tax as an excuse to avoid estate planning: The jig is up! Ironic as it may seem amid all the uncertainties of this election year, the future of the estate tax is more certain now than it has been in years.
| Row 0 - Cell 0 | Passing on the Family Business |
| Row 1 - Cell 0 | Advice on Leaving a Legacy |
| Row 2 - Cell 0 | The Basics of Estate Planning |
A quick refresher course: Back in 2001, Congress passed a law to phase out the tax. The amount Americans can pass to their heirs tax-free was set to rise from $675,000 in 2001 to $3.5 million by 2009 (it's $2 million this year). Then, in 2010, the estate tax was supposed to expire. But there was a catch: The tax was also scheduled to rise from the dead in 2011 with a paltry $1 million exemption.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That seesaw scenario is what had a lot of people pulling out their hair instead of planning. Although the schedule is still in place, it's clear that it will never happen. Why not? The next president is against it. John McCain and Barack Obama oppose repeal of the estate tax.
Obama would let the $3.5 million exemption continue; McCain would prefer a $5 million exemption. Because the law allows married couples to double the tax-free amounts, it's likely that, in the future, couples could leave their heirs a minimum of $7 million -- and maybe up to $10 million -- before Uncle Sam gets a bite of their assets.
What about the one-year estate-tax hiatus in 2010? "It ain't going to happen," says William Kirchick, an estate-tax lawyer with Bingham McCutchen, in Boston. "It's not a reality, and it was never intended to be." By the end of next year, Kirchick expects Congress to okay a tax-free amount for 2010 of at least $3.5 million, and perhaps $5 million.
A more contentious issue is likely to be the top estate-tax rate. Now 45%, some observers see the rate falling to 35% or even lower, while others believe it may be pushed back up to the 55% rate in effect before the 2001 tax changes.
Few Need Fear the Estate Tax
The higher exemptions mean fewer Americans than ever need to worry about the estate tax. In 2006, when the exemption was the same $2 million it is today, fewer than 3,000 estates actually owed the tax.
Still, it's important to establish an estate plan, which starts with writing a will and may include a medical directive and trusts. "Even if you're not subject to federal estate taxes, you need to have a plan to pass on the wealth and the control of assets," says Don Chapin, an elder-law lawyer with Chapin Law Offices, in Dublin, Ohio.
If you do face a potential estate-tax bill, planning can help reduce the amount hit by the 45% rate. You can give any number of people up to $12,000 a year without paying gift taxes. Beyond the annual gift-tax-free allowance, you can give away up to $1 million gift-tax-free during your lifetime. "All the value of the gift, and the income and appreciation of what you give away, is no longer in your estate," says Thomas Campbell, an estate-planning lawyer with Yates, Campbell, Christopher & Yates, in Fairfax, Va.
If you're married and your estate is likely to fall in the taxable range, a planner will likely recommend a credit-shelter or bypass trust. If a husband leaves his entire estate to his widow, the amount would pass tax-free thanks to an unlimited marital exemption. Without a credit-shelter trust, when the widow dies, only the exemption amount ($2 million this year) could go tax-free to the children.
With the bypass trust, the husband could leave the exemption amount in trust to the children, with the trust income going to the widow. When she dies, the children would get the money from the trust estate-tax-free and Mom could also leave them the exemption amount estate-tax-free. If both parents died in a year the exemption amount was $3.5 million, a total of $7 million would go to heirs estate-tax-free.
For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger's Retirement Report.
-
My First $1 Million: Self-Employed Trader, 50, San FranciscoEver wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
Think You Know How to Be Happy in Retirement? These 9 Stats May Surprise YouWhen it comes to your retirement happiness, don't believe everything you hear. We've turned to solid research for the facts on finding your bliss in retirement.
-
If You're Retired or Soon to Be, Don't Miss These Tax BreaksThe OBBB offers some tax advantages that are particularly beneficial for retirees and near-retirees. But they're available for only a limited time.
-
457 Plan Contribution Limits for 2026Retirement plans There are higher 457 plan contribution limits in 2026. That's good news for state and local government employees.
-
Medicare Basics: 12 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2026SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $70,000 in 2025, and up to $72,000 in 2026.
-
Roth IRA Contribution Limits for 2026Roth IRAs Roth IRAs allow you to save for retirement with after-tax dollars while you're working, and then withdraw those contributions and earnings tax-free when you retire. Here's a look at 2026 limits and income-based phaseouts.
-
SIMPLE IRA Contribution Limits for 2026simple IRA For 2026, the SIMPLE IRA contribution limit rises to $17,000, with a $4,000 catch-up for those 50 and over, totaling $21,000.
-
457 Contribution Limits for 2024retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2026retirement plans The Roth 401(k) contribution limit for 2026 has increased, and workers who are 50 and older can save even more.
