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Is 2010 the Year to Die After All? Hedeker & Perrelli Address the Estate Tax Debate

Posted On 12/17/2009

There’s a debate brewing in Congress that has many tax advisers scratching their heads. The debate is over whether or not to let the federal estate tax (also known as the “death tax”) die out for at least a year. Here's the situation as we see it, and why you should care.
 
What is the federal estate tax?
 
Currently there is a federal estate tax in place for individual estates worth more than $3.5 million. That means, when you die, any assets you own above that amount will be taxed – currently at 45 percent – when the estate transfer to your heirs. So an estate worth $6 million, for example, is taxed well over $1 million, which is significant. And it’s also significant revenue for the federal government. Bloomberg News reported this morning that the federal estate tax yields about $25 billion annually in much needed government revenue.
 
The current estate tax rate is set to expire in 2010, with a much lower exemption of $1 million going into effect in 2011. That rate will affect many more of us. Theoretically, 2010 could be a tax-free year (as far as federal estate taxes go) which is why experts have been joking about it being “the year to die” for upper-class Americans.
 
 
What is the current situation?
 
We all assumed that the current rate and exemption limit would be extended for one year. But Congress, as usually, has complicated the situation.
 
The House voted to permanently extend the current rate and exemption limit. Which is what many of us expected would happen. Now it’s in the Senate’s hands and things are getting heated. As of Wednesday, the Republican majority in the Senate prevented an extension from happening, making the scenario of  2010 being the year to die  an eerie reality. Senate Democrats, however, have pledged to readdress the issue in 2010 and push for a retroactive tax to be set in place as soon as possible.

 

“This is typical of how Congress operates. They knew about this problem since the day the legislation was drafted in 1991, but yet they wait until the 11th hour to deal with this. Even then, they still cannot agree on things. ”  --Dean Hedeker, Hedeker & Perrelli, Ltd.

 
What does this mean to us?
 
If you have assets of $1 million or more (that includes a home, stocks, and retirement investments), you need pay attention to the situation. That’s because:
  • As of today, the estate tax is still scheduled to be back with a vengeance in 2011, at only a $1 million exemption.
  • Any large estates that potentially escape a federal estate tax in 2010 may cause inheritors other tax headaches, particularly in capital gains taxes.
  • Most states have their own estate or inheritance taxes. Whlie Illinois' $2 million estate tax disappeared with the federal tax, there's no guarantee that it won't be reinstated retroactively.

“This is a nightmare for clients, because it would cause estates less than $3.5 million to be subject to capital gains. This changes the way we plan.”  --Anthony Perrelli, Hedeker & Perrrelli, Ltd.

 What can be done?

You can significantly reduce estate taxes by taking three important steps:

  • Trust in Revocable Living Trusts
  • Gift your money while you are alive
  • Review the “valuation” of your assets
 
Talk to your tax adviser about potential implications for your own family. If you have parents or grandparents who are living, make sure that their advisers take these developments seriously as well.
 
 
This information was provided by Dean Hedeker and Anthony Perrelli, estate planning and tax attorneys and partners of Hedeker & Perrelli, Ltd. in Lincolnshire, Illinois. Their advice as been featured by Money Magazine, WGN News, Sun-Times papers, Bankrate.com, CBS2 Chicago, and many more. Their book Cut Your Tax in 2010 (And Preserve Your Legacy) will be released in early 2010. To learn more about Dean Hedeker and Anthony Perrelli, visit www.cutyourtax.com 

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