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THE FALLACY OF ESTATE TAX 7/24/2003 The recently passed Federal Estate tax amendment has received all sorts of both positive and negative comments. Those without financial resources have hailed it as a terrible piece of legislation. Of course, those who have accumulated assets are quite pleased that they will be able to pass on to those they desire the fruits of their labor. What then is the reason for such a wide difference of opinion? The current law allows for each individual to transfer at death $1,000,000.00. In Tennessee, the state likewise allows for a similar exemption up to $850,000.00. This means that if planned properly a husband and wife will be able to transfer at death a total of $2,000,000.00. One might ask why then should the estate taxes be either eliminated or raised. Isn’t this dollar number sufficient to exempt most estates from any death taxes? Certainly the answer is yes. But why then are we about to have a major change in the estate tax laws. Needless to say, it doesn’t take much to increase the size of one’s estate. Not only do we have the income that we are generating which is allowing us to build our asset base, but other things are also helping out in the wealth accumulation process. Our parents are getting up there in age and inheritances are not as small as many might believe. With the appreciation of our real estate and the increases in our pension plans, all of a sudden the $1,000,000.00 doesn’t look as big as it might have when we first got out of undergraduate school with a diploma fresh in hand. There are many of us that all of a sudden, even with the recent stock market corrections, that still find our balance sheets above not only the $1,000,000.00 but also reaching beyond. These estate values have required in the past various planning techniques. Certainly, the planning process will continue into the future. With the estate tax starting above the $1,000,000.00 at 41% and quickly moving higher, one could normally avoid tax on the first spouse to die, but then could get hammered on the second death. This is why second to die life insurance policies held by trusts became so popular over the past several years. Of course those who fall below the estate and inheritance tax levels clearly feel that the “ rich “ or “ wealthy “ should give up a portion and possibly a large portion of their accumulated wealth to be redistributed to the “ poor “. This would be fair to those who have not been as fortunate financially and it would not “ reward “ first generation children who haven’t done anything to deserve receiving such a large wealth transfer. For those who have been able to build their estates, they otherwise feel that they should have the ability to transfer to whoever or wherever the fruits of their labor and not have a government authority dictate to them what they should do or tax them at the high levels of today. These arguments will go on forever. They many in fact be high on the talk list for the next nine years as we work our way through the new tax law. Basically the new law has expanded the amounts which individuals can pass through their estates and by 2010 eliminates the Federal Estate tax altogether. For the years 2002 and 2003 the federal exemption rises to $ 1,000,000.00 per individual and then for the year 2004, 2005, 2006 the amount goes to $1,500,000.00 per individual. For the years 2007 and 2008 we are at $2,000,000.00 and the for the year 2009 we have one year at the $3,500,000 amount before the estate taxes are eliminated altogether in the year 2010. For those of us whose estates exceed these amounts, we need to continue the various estate planning techniques that many of us have used on a regular basis. These include bypass trusts, insurance trusts, family limited partnerships and gifting. The real question is do we really want to give all this wealth to our children. This is the topic of the article which follows. Donald R. Raber, President of Aldebaran Financial in Kingsport is the former head of the Trust Department of First American Bank in Kingsport and is a graduate of the ABA National Graduate Trust School. He can be e-mailed at raberdon@aol.com |
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