You might, if you're a U.S. citizen or permanent resident, and want to spare your heirs from paying estate tax at a rate as high as 55%. But don't make your funeral arrangements just yet. Congress might change the law before the estate tax temporarily expires in 2010.
In 2001, Congress radically retooled federal wealth transfer tax laws. The amendments raised the estate tax and lifetime gift exemption amounts, lowered the top estate tax rate and eliminated the estate tax all together for 2010. But in 2011, estate tax rates will return with a vengeance. Instead of the current US$3.5 million threshold, they’ll revert back to the 2002 threshold of US$1 million. And should your estate exceed US$1 million, it will be taxed at a maximum rate of 55%--up from today's 45%.
Congress has dithered for nearly a decade without dealing with the ridiculous uncertainty it's caused more than three million wealthy American families. Yes, Congress still has a little more than two months to enact corrective legislation. But if your estate exceeds US$1 million, you'll want to consider some ways to reduce your estate tax liability.
More about that in a moment. But first, let's consider how Congress might amend the wealth transfer tax laws, should they decide to act. It's quite clear that both the Obama administration and congressional leaders don't want the estate tax to "sunset" in 2010. The path of least resistance to achieve this goal would be to amend the law to keep federal wealth transfer tax rules the same as they are for 2009. Congress could then re-address these laws at a later date.
Here is a summary of other proposed modifications to federal wealth transfer tax rules currently before Congress:
- Decrease the federal estate tax exemption to US$2 million for 2010 and index it for inflation thereafter.
- Increase the federal estate tax exemption to US$4 million or more for 2010 with or without indexing it for inflation thereafter.
- Impose the federal estate tax at a rate from 35%-55%
- Permit a widowed spouse to utilize the unused federal estate tax exemption of his or her predeceased spouse.
- Eliminate or at least restrict the ability to obtain valuation discounts for gift and estate tax purposes in entities such as limited partnerships.
So, dying in 2010 doesn't seem like it's such a good strategy to avoid estate tax after all. But what options do you have to deal with this congressional uncertainty? Here are some ideas to consider that should remain effective to reduce estate tax no matter what Congress decides:
- Marital bypass trust. If you're married, this simple trust (sometimes referred to as an "A-B trust") can double your estate tax exemption. While this kind of trust often stands alone, you can also incorporate it into an offshore trust formed in any suitable offshore jurisdiction. That way, you'll obtain state-of-the-art asset protection for your wealth, and also double your estate tax threshold.
- Lifetime gifts. You have a US$1 million lifetime gift tax exemption. If you own assets that have substantially fallen in value in the last year or two, why not gift them to your loved ones now, before values recover? And don't forget that you can give anyone a gift valued up to US$13,000 annually without reducing your lifetime exemption.
- Life insurance. Insurance enjoys uniquely preferential tax treatment under U.S. law. With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes. Essentially, you avoid tax on portfolio income and transactions in exchange for the cost of insurance. Again, you can use a tax-qualified offshore life insurance policy for enhanced investment choices and asset protection.
One final note: Proper structuring of your estate plan requires substantial legal expertise. There are many potential pitfalls. Be certain to retain a qualified attorney before you put any of these strategies into place.
Copyright © 2009 by Mark Nestmann
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