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Estate Tax: Timing is Everything

By Joel Dresang

Confusion and clamor over the federal estate tax should remind investors to plan what eventually will become of their assets after they die.

Congress and the White House negotiated on how to tax estates as part of an overall plan for dealing with various tax issues set to expire at the end of 2010.

After being repealed for 2010, the estate tax was scheduled to revert to previous levels – applying to more taxpayers and taxing them at higher rates than in 2009, when the top rate was 45% with an exemption for the first $3.5 million of an estate.

A compromise arrangement from Washington, scheduled to expire at the end of 2012, would set the exemption at $5 million – $10 million for a married couple – with a maximum rate of 35%.

Because of exemption provisions, relatively few Americans have had to worry about the estate tax. Only about one in every 460 deaths triggered an estate tax in 2009, according to the Tax Policy Center, run by the Urban Institute and the Brookings Institution. In other words, 99.8% of deaths resulted in no estate tax in the latest data available.

But even if the estate tax ends up applying to relatively few Americans, some of the fundamental considerations for estate taxes should be incorporated into all investors’ planning. Whether you’re likely to be subject to the tax or not, you should think about how your assets can provide for your family and your financial objectives after you die.

Here are some first steps:

  • Take an inventory.  The first thing you want to ask is what is the sum of your assets? Include your investments and retirement savings, the value of life insurance policies you control, real estate and business holdings.
  • Make a plan. Determine what you want done with your assets after you die. How does a surviving spouse figure in? What about children or other relatives or charities? Bequests to spouses are not subject to the estate tax. That is one common way to avoid it. But if your assets are potentially large enough, leaving them to your spouse could make your spouse’s estate taxable at his or her death.
  • Prepare a will. Wills and living trusts are legal documents that communicate how you wish to distribute your assets. Spare your survivors any guesswork. And once you have a will, keep it up to date.
  • Check retirement accounts. Wills normally don’t control your assets in IRAs or retirement plans, so make sure you designate beneficiaries of those accounts – and keep them current.
  • Consider other contingencies. Be sure you’re covered for the possibility of disabling injuries or medical conditions by making provisions for a durable power of attorney and health care power of attorney.
Investors with enough assets to worry about the estate tax should seek professional guidance from a trustworthy specialist, such as an estate attorney.

Thinking ahead about your wealth and how you’ll put it to use – even beyond your lifetime – can be a worthwhile exercise in evaluating how your long-term investments are aligned with your objectives.

Joel Dresang is vice president of communications at Landaas & Company.

initially posted Dec. 10, 2010, updated Dec. 20, 2010

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