Inheritance Tax Laws in State of Confusion
Every client coming in to prepare a will or trust is fearful of inheritance taxes, and the question is always asked, “How much will I lose to inheritance taxes?” Although many people are not subject to any tax, the unfortunate answer we have to give varies on what year a person might die, and the law is so silly it will either make you laugh or cry.
Almost a decade ago, some members of Congress wanted to eliminate the Federal “death” tax. Others wanted to increase it. In testimony to a clever but silly compromise, the two sides agreed that the Federal exemption would increase over the years from $1 million to $3.5 million and the tax would be eliminated entirely in 2010. The congressmen who wanted to claim they had voted to eliminate the tax could point to the increasing exemption and elimination in 2010. Fine so far, and in fact there is no Federal estate tax in 2010, so if you are Bill Gates and want to pass everything on to your heirs without Federal tax, this would be a good year to leave this world.
But there is more, because the Congressmen who wanted to say they had increased the tax, put in a provision that on January 1, 2011, the tax was back and the exemption would be reduced to $1 million. Now that may sound like a lot, but since it includes your house, your IRA’s and life insurance policies you own among assets counted, a fairly large number of Americans can be touched by this tax. If you have the fortune to live another year, you will potentially be subject to this tax. And the rates start at 45 percent once you are over the limit. And that does not count Connecticut succession tax which has a $2 million exemption.
All of this can lead to some macabre humor about whether someone’s great aunt with assets over $1 million should be kept alive on life support until after the ball falls at midnight on January 1, 2011, or should have the plug pulled before 2010 year end, because in 2010 there is no Federal tax.
It would be funny if it didn’t highlight the crazy guilt approach Congress took to making this law. So what is a person to do? It depends on the size of your assets, whether you are single or married, and when you might die. The best counsel is to seek sound advice from an attorney who handles estate planning, so that a comprehensive solution can be found for your particular situation. There are time tested and legally accepted methods to reduce or eliminate both Federal and Connecticut inheritance taxes. Hopefully, Congress will turn its attention to amending this law and we will all be able to escape this state of confusion.