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Estate Tax by Attorney Fish


S. Robert Fish, Jr., Esq. 2008

In 2001, Congress passed sweeping changes to the estate tax system, which, among other things, substantially raised the federal estate tax exemption levels. However, budgetary requirements limited the change in the estate tax laws to a ten year period, after which they \"sunset\" and theoretically return to prior levels. Many people in the estate planning field believed that estate tax \"reform\" would come well before the sunset period. However, the estate tax is a very polarizing issue and no bill has been able to garner the requisite votes in the Senate to secure passage. As we move closer to the next decade, more of our clients express concern and consternation regarding this period of relative uncertainty.

As many of you may be aware, the current federal estate tax exemption is $2.0 million and the estate tax rate is 45% on every dollar over $2,000,000. On January 1, 2009, the estate tax exemption is scheduled to increase to $3.5 million with the same 45% estate tax rate. In 2010, the federal estate tax is supposed to be nonexistent for one year, but in 2011, the tax is scheduled to be reintroduced with a $1.0 million exemption and a 55% top marginal tax rate. Despite the alluring potential of no estate tax in 2010, there are few, if any, prognosticators who believe that the estate tax repeal will happen, even for one year. Therefore, regardless of who is President of the United States in 2009, Congress must act next year. Of course, the results of the Presidential election will have a significant effect on the shaping of estate tax policy. As such, we believe it is instructive to know the candidates\' position on this very controversial issue. From our review of websites and articles in the press, here are the candidates\' current positions on the estate tax.

Senator Obama proposes to maintain the $3.5 million exemption and 45% tax rate in 2009 and thereafter. Under the Obama proposal, proper planning with trusts by a married couple could exclude $7 million dollars of assets from federal estate tax.

Senator McCain proposes a $5.0 million dollar exemption and 15% tax rate in 2009 and thereafter. The rationale for the 15% estate tax rate is that it would coincide with the current capital gains tax rate. However, the current 15% capital gains tax rate is set to expire on December 31, 2010 and return to a higher rate. It remains to be seen whether Congress will increase the estate tax rate if the capital gains tax rate is increased.

The interrelation between the estate tax and the capital gains tax is critical. Both candidates support the current basis \"step-up\" rules. Simply put, the step-up in basis rules value inherited assets at their date of death value or, in certain situations, at six months after death and not at their value when purchased by the decedent. Therefore, if one were to buy stock when it was valued at $10 per share and it was worth $50 per share on that person\'s death, the decedent\'s beneficiaries could sell the stock for $50 and pay no capital gains tax, whereas if the decedent had sold the stock during his lifetime, he would have paid the tax on the difference between his $10 dollar purchase price and the value on sale.

Massachusetts Estate Tax

Although there has been a great amount of time spent considering the future of the federal estate tax, comparatively little time has been dedicated to the Massachusetts estate tax and other similar state estate taxes. Currently, the estate tax exemption for Massachusetts estate tax purposes is $1.0 million dollars. The top rate of tax, on those with $10.0 million or more of assets is 16%. An estate of $2.0 million would pay approximately $100,000 in Massachusetts estate tax. As with the federal estate tax, proper trust planning can shelter $2.0 million from the Massachusetts estate tax and not just $1.0 million.

Estate Planning Documents

In order to capture the maximum estate tax exemption for married couples, it is critical to have a tax effective estate plan in place. For some people, the use of tax effective estate planning will become even more critical. Currently, the use of fully funded sophisticated estate planning trusts will save $780,800 of federal estate tax and approximately $100,000 of Massachusetts estate taxes. With a $3.5 million dollar exemption and a 45% tax rate, the trusts could save as much as $1,455,800 of federal taxes if fully funded.

The estate plans which we draft are designed to be effective based on the current estate tax system and not based on the exemption level or tax rate in any particular year. As both candidates favor the current system of estate tax many of our clients with sophisticated tax effective trusts may need no change in their documents at all, irrespective of what action Congress ultimately takes. However, we recommend people review their estate plans every 3-5 years, and a change in the law would provide a valuable starting point to take advantage of a potential opportunity. Of course, if you have had a major change in your family situation, you should revisit your estate plan irrespective of tax law changes. Finally, when there are major changes in the estate tax law, we will keep you advised.