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Now that the election is over many people are wondering what effect the new administration will have on many issues and policies. Obviously the most pressing question for everyone is the economy and how the government will deal with those problems. However another issue that this administration will have to deal with is the estate tax (often called the Death Tax) system. This article will briefly explain what the Death Tax is, what the current law is and some ways to avoid the Death Tax.

What is the Death Tax?

The Death Tax is a tax imposed on any assets you transfer to anyone as a result of passing away. The tax applies to probate assets (items transferred by your will) and non probate assets, including items transferred by trust, life insurance policies, IRAs and other accounts with designated beneficiaries. This tax rate can be as high as forty-five percent (45%) of the assets transferred, so obviously people what to do whatever they can to avoid paying this tax.

What is the Current Estate Tax System?

As it stands now, the estate tax system provides an exclusion from estate tax for the first $2,000,000 of assets transferred by anyone as a result of death. The exclusion actually goes up to 3,500,000 in 2009 under the existing law. The law also allows a person to pass on unlimited amount of property to their spouse free of estate tax. Thus under the current system many people do not have to worry about the Death Tax as they can leave their assets tax free as a result of the exclusion.

One of the issues arises because the current law will change every year for the next three years. As stated in 2009 the exclusion amount goes up to $3,500,000. In 2010, the death tax is completely repealed and anyone can leave an unlimited amount of property to anyone tax free. Then in 2011 the exclusion reverts back to the $1,000,000 that existed in 1999. Needless to say the current law is not only slightly confusing, but also creates many problems for people in planning and could have some unintended consequences. For this reason the administration will most certainly address this issue in the coming session.

What will the administration do?

This is certainly not a question anyone can answer with certainty. About the only certainty is that the issue will be addressed at some point before 2010 will the death tax is completely repealed. There is talk of permanently repealing the death tax; however, this is unlikely given some procedural rules in Congress that make permanent tax cuts difficult. There is also talk of lowering the exclusion or raising the exclusion. We will all have to wait and see.

What can I do now to plan?

Given the uncertainty of the existing law it is imperative that you work with a qualified team to prepare your estate planning documents. You need to insure that you have an attorney, accountant, and investment advisor you can help you properly plan for the uncertainty that lies ahead. There are many tools available to help you in this regard. The most common tool is a Bypass Trust (sometimes called an AB Trust). This is a type of trust that allows a married couple to maximize both of their exclusions from estate tax while still leaving all of the marital assets available for the surviving spouse. There are also other types of trusts and devices that can help to reduce potential tax exposure including Irrevocable Life Insurance Trusts (an ILIT) or Charitable Remainder Trusts (a CRT) or family limited partnerships (a FLP). These devices all can help to maximize your tax savings. All of these issues are relatively complex and it is strongly encouraged that you consult with your estate planning team before creating any of these types of documents.

As always, this article contains a very brief discussion of the issues involved and should not be relied on for legal advice. Also, any opinions in this article are those of the author and not intended for legal advice. Contact our office for more information.

Samuel T. Crump, Sr.

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(623) 526-5597

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