More than seven years ago,
President George W. Bush
signed into law the Economic Growth and Tax Relief Reconciliation
Act of 2001. This legislation was
designed to reduce federal estate taxes
by increasing the exemption amounts
and reducing estate tax rates over time,
with a complete repeal of the estate tax
scheduled for 2010. However, it is
expected that Congress will act in 2009
to head off the scheduled repeal of the
estate tax.
Against this backdrop, it is crucial to
review existing estate plans and prepare
for potential future scenarios.
“Estate plans should be revisited whenever estate tax laws are about to change
significantly,” says Sally Larson Sargent,
senior vice president and head of personal trust administration for MB
Financial Bank in Chicago.
Smart Business spoke with Sargent
about the current estate tax laws, what
changes may be in store for the future
and the importance of staying abreast of
changes to the tax code.
What are the current laws in regard to
estate taxes?
The federal estate tax exemption has
increased dramatically since 2001, when
it was $675,000. This year, the federal
estate tax exemption is $2 million. Next
year, the exemption will increase to $3.5
million, with a complete repeal of the
federal estate tax scheduled to take place
in 2010. Federal estate tax rates have
dropped over the same period of time,
from 55 percent in 2001 to 45 percent this
year and in 2009.
If Congress takes no further action, the
federal estate tax will disappear in 2010,
only to be reinstated in 2011 with an
exemption of $1 million and highest
estate tax rate of 55 percent. It’s a strange
situation. Few estate planners believe
that federal estate tax regime will play
out over the next few years as initially
enacted back in 2001.
What changes in the estate tax law are
being discussed?
Various bills have been introduced over
the last few years to address the pending
repeal of the estate tax, but none has
made it into law. Today, there doesn’t
seem to be any real expectation that the
estate tax will be abolished as the law
currently anticipates — both because of
budget deficits and the belief that such a
move would not be supported by a
majority in Congress. Assuming that the
estate tax is not abolished in 2010, there
have been recent proposals that would
freeze the federal exemption at the 2009
amount of $3.5 million and others that
would increase the exempt amount to $5
million. At recent Congressional hearings, estate planning experts have suggested modernization of the rules that
apply to installment payments of estate
taxes for closely held businesses.
Experts also have suggested that the
exemption amount should be ‘portable’ between spouses, meaning that if an
exemption is not used fully in the estate
of a deceased spouse, the unused portion
should be available to the estate of the
surviving spouse.
How do you anticipate the upcoming presidential election will impact estate tax laws?
All that we know for sure is that the
estate tax laws are unlikely to be touched
until after the November elections. After
the election, Congress likely will make
the estate tax a priority, given the looming repeal of the estate tax in 2010.
Neither of the presumptive presidential
candidates supports the full repeal of the
estate tax. Sen. John McCain’s tax plan
favors a permanent $5 million exemption
and a 15 percent estate tax rate, while
Sen. Barack Obama’s plan favors a freeze
at the 2009 estate tax parameters of a
$3.5 million exemption and a 45 percent
rate. The likelihood of either plan becoming law will depend on political, economic and deficit-related considerations.
Why is it so important to stay on top of
changes to the tax code?
A carefully crafted, flexible estate plan
that anticipates changes in the estate tax
laws is the key to minimizing taxes and
maximizing what will pass to beneficiaries. The federal estate tax is only one
component of taxes imposed at death,
however. State taxes also can be significant. As the federal estate tax exemptions have increased over the last several
years, many states have enacted new or
revised state death taxes, because states
no longer are receiving state death tax
credits that previously were part of the
federal estate tax regime. With many
states ‘decoupling’ from the federal
estate tax system and creating their own
death tax regimes, planning for state
taxes can be critical, as well.
SALLY LARSON SARGENT is senior vice president and head of personal trust administration for MB Financial Bank in Chicago. Reach
her at (847) 653-2158 or [email protected].
