Legislation may affect estate tax plans
By Amos Goodall
After almost a decade of changes to federal estate taxes and states' changes to their tax structures, clarity appears to be on the horizon. Congress' recently passed budget resolution would make the current estate tax rules permanent, taxingly only estates more than $3.5 million in value with the tax rate set at 45 percent.
Although no actual legislation has yet been voted on, the nonbinding budget resoultion sets guidelines for Congress to follow when writing tax and spending legislation later this year.
Pennsylvania has not changes its tax laws (yet). Therefore, while the advice most lawyers give is "stay tuned" until Congress speaks definitively, its important to start planning now, because there are important decisions to be discussed and options considered.
In light of this, taxpayers need to review their estate plans with the following issues in mind:
- Simplify if possible.
The increase in the tax threshold from $600,000 at the beginning of the decade to $3.5 million today, coupled with the drop in most taxpayers' net worth over the past year, means that many people who had taxable estates no longer do. They may be able to significantly simplify more complicated estate plans that were necessary in the past to eliminate or decrease federal taxes due at death.
But pennsylvania tax laws are important too. In the past, most states had very similar estate tax laws that were tied to the federal laws. Pennsylvania has always had its own inheritance tax system.
The value of certain assets, such as some jointly owned assets, is reduced for Pennsylvania purposes, and some assets such has life insurance are not taxed in Pennsylvania at all. Other transactions, such as gifts within one year of death are partly taxable in Pennsylvania and generally not at all federally.
In addition, may Pennsylvanians own real property in other states, and thos states' tax and probate laws need to be considered. Pennsylvania's inheritance tax rules are different than other states', so that taxpayers who have money moved from another state since signing estate planning documents need to consult with attorneys here. - Review life insurance.
All consumers should have their life insurance policies reviewed if they have had them for more than a few years. Some universal life policies that were based on projections made when the economy was stronger may be "underwater" and may need more robust premium payments to sustain them over the long term.
With other policies where the premiums were based on old tables measuring life expectancy, the consumer may be able to lower her premium payments or increase the death benefit. Finally, consumers should never simply drop policies they no longer need or afford. They may be giving up a large benefit for their heirs and theymay be able to sell the policy for a larger return than the policy's cah surrender value.
Review retirement plans as well as any other beneficiary designations, because beneficiaries and their needs often change. We have had several cases in the past several years where World War II veterans still had their long-deceased parents listed on their GI insurance and, while we were still able to collect on the policies, the recipients may not have been their first choice. - Refocus estate planning.
The threat of the estate tax had the beneficial effect of prompting many consumers to do estate planning. But it also sometimes diverted them and their advisers from the real purpose of estate planning: to leave the legacy they want. The estate plan people leave can benefit children and grandchildren for decades to come or it can cause familial strife that tears the family apart. The choice of executor and trustee and the terms under which heirs will receive property are vital issues that deserve your full consideration, regardless of whether taxes are an issue.