The State of the Estate Tax and Its Impact on Planning

 
Despite the statistic that only about 2 percent of estates pay estate taxes, the estate tax brings in around $70 billion a year in tax revenues. If repealed, some say the total loss of revenue over a 10 year period would exceed $700 billion plus interest. Yet, many Republicans are still pushing for a full repeal of the estate tax and will lobby Democratic senators strongly until a Senate vote scheduled for May.

Even with strong lobbying efforts, repeal is still a long shot. Sixty votes are needed for approval, and proponents are still a few votes shy of the mark. A compromise, however, may be on the horizon. According a recent Kiplinger Tax Letter, lawmakers are expected to eventually approve an exemption in the $5 million range, with the top estate tax rate of 46% reduced to 25 – 30%.

In any event, the increase in the exemption will necessitate a review of most Wills and many of the Credit Shelter Trusts may be set up in those Wills. Credit Shelter Trusts are primarily set up for income to go to a surviving spouse for his or her lifetime with the principal going to nonspousal heirs at the death of the spouse. These trusts are generally funded with assets to use up part or all of the estate tax exemption amount. The transfer isn’t taxed, and the rest of the assets can pass to a surviving spouse free of estate tax through the marital deduction. The higher exemption can create problems for surviving spouses when a trust’s funding formula is pegged to the amount of the exemption. As the exemption increases, more assets go into the trust for the nonspousal heirs leaving less assets outright to the surviving spouse. This may cause a serious unintended result for a surviving spouse.

FWIW - Spring/Summer 2006

FWIW is intended to inform readers of developments in the field of valuation. The articles written may, or may not, reflect the opinion of the authors. Please note, any advice contained in this publication was not intended, or written, to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is distributed with the understanding that the publisher and distributor are not providing legal, accounting or other professional advice and assume no liability whatsoever in conjunction with the information contained within this publication.