Estate tax planning? The "death tax" wasn't repeal with higher exclusions will it apply to your estate?

• Author: McKimmie, Kathy
• Position: ESTATE PLANNING

PRESIDENT BUSH'S 2001 tax package included a phase-out of the estate tax--"death tax" to some--with full repeal in 2010. But to get it passed without a straight-up vote, it was part of a 10-year budget reconciliation bill that sunsets in 2011, reinstating the tax at prior law levels and rates--$1 million and 55 percent. Immediately, jokes circulated about planning your death for 2010.

It seemed like there would be plenty of time to get back in there and pass a full and permanent repeal, right? Well, five years later, with a raging budget deficit and the first Baby Boomers turning 60, prospects are dim, though the rhetoric drones on.

Much more likely, say Indiana's financial experts, is a compromise bill, perhaps like the one passed in June by the U.S. House of Representatives and now pending in the Senate. H.R. 5638 would set the exclusion amount for estate tax at $5 million, $10 million for a couple, and peg the tax rate at the capital gains rate, now 15 percent, effective January 1, 2010, says Regina Smith, senior vice president and senior fiduciary officer at National City Bank, Indianapolis, so the repeal would never go into effect.

Other provisions of bill, called the "Permanent Estate and Gift Tax Relief Act of 2006," would reunify the estate tax, gift tax and generation skipping transfer tax, she says, and would be easier to administer. For estates above the exclusion amounts but less than $25 million, the capital gains rate would apply, above that amount the tax rate would double. That's a lot better than the 46 percent rate for 2006 and the exclusion of $2 million, $4 million for a couple. "If this bill passes, estate tax for 99.7 percent would be eliminated," says Smith. "Three out of 1,000 estates would have estate tax."

Plan now, or wait? The big question, she asks, is should people continue estate planning while estate tax repeal or exemption is in a state of flux? Yes, she says. No matter where a family is on the wealth spectrum, the vast majority of estate plans have a funding clause, she says: how the pie is to be split. Without a plan, "some group is going to get a windfall," others will be disappointed. "Estate tax is only one consideration. The estate tax should not wag the estate plan, it should be an element." Decide to whom you want to leave your assets, she advises, then develop your ideas and hand them over to your advisor.

Less and less planning for estate tax avoidance is necessary now, says Jay Benjamin, partner...