My F&M

The Moving Target

Little yellow ducks motor across the landscape in front of you as you zero in on the one in the third row. You carefully pick up your air powered rifle, close one eye, aim and pull the trigger…POW, the duck falls down and you win the purple teddy bear for your kids.

Over the next few years, estate planning will prove to be a little bit like the duck hunt game – a moving target as the estate tax exemption changes drastically from year to year. This makes “zeroing in” quite the challenge.

What is estate tax?

Estate tax is the tax levied on the transfer of a person’s property at the time of his or her death. How does this work? As it stands in 2008, Congress allows an individual to pass up to $2 million to their heirs without an estate tax. This is called the estate tax exemption. Anything over and above this amount is taxed as high as 45%. Not to mention, this doesn’t take into consideration the amount of estate tax you may owe the state coffers.

One important caveat to the estate tax is the marital exemption. The marital exemption allows you to pass an unlimited amount to your spouse without any estate tax. If your combined estate is below the estate tax exemption ($2 million in 2008) then making use of the marital exemption may be enough. But if you leave everything to your spouse and then add on the growth of the assets until your spouse dies, your heirs could face a large estate tax upon the second spouse’s death. Hence, the unlimited marital exemption doesn’t always work well.

How is it changing?

The estate tax exemption for 2008 is $2 million and will increase to $3.5 million in 2009. In 2010, the estate tax is scheduled to be repealed completely, meaning if you pass away in 2010 you won’t owe any estate tax regardless the size of you estate. But in 2011, the estate tax exemption slips back to $1 million. The wild card here is Congress has been known to change its mind. Given the disruptions that would occur from the repeal in 2010 and the reversion to $1 million in 2011, its likely these changes will never come to fruition. In fact, all of the major presidential candidates have proposed increasing the estate exemption to at least $3.5 million. All said, it’s likely we’ll see the estate tax exemption settle somewhere between $3.5 million and $5 million, but no one really knows until the ink hits the paper and it’s signed into law. The question becomes, how do you prepare for this “moving target” today?

Where to start?

Don’t let the uncertainty in the upcoming estate tax exemption delay your action today. You never know when your death will occur so it’s important to be prepared. Like aiming for the duck in the third row it’s important to “zero in” on the value of your estate in conjunction with the estate tax laws as they stand in 2008. Predicting the future is impossible, but we can prepare for today and estate planning documents can be drafted in a way that builds flexibility for the inevitable changes in the estate tax exemption.

If you don’t have estate planning documents in place, then there is no time like the present. If you do have estate planning documents, remember an estate plan isn’t something you stick in a drawer and never look at again. Periodically, it’s important to review your estate planning documents to make sure they still meet your needs. Not having estate planning documents or having outdated documents could leave your heirs with a hefty tax bill! Make sure you’re prepared for this “moving target”.