Death and Taxes: Far From Certain

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When our country was in its infancy, statesman Benjamin Franklin penned the phrase, “The only thing certain is death and taxes.” For years, that quote held true.

Taxing bodies, large and small, have levied taxes, and have frequently sought the rich and, in particular, those who were both rich and dead. I’ve often thought that our government targets this group as they don’t vote, nor do they write letters to their representatives.

Uncertain Times

Over the last 10 years, the estate tax legislation was on a series of relatively predictable annual changes. All that changed in December 2010 when Congress passed estate tax legislation that included the following:
• A top tax rate of 35 percent.
• A $5 million-per-taxpayer exemption for lifetime gifts and transfers at death.

The $5 million exemption is portable, allowing (in the case of a married couple) the estate of the second spouse to die to utilize any unused portion of the first spouse’s exemption (certain requirements apply).

Without further legislation, these changes will end after Dec. 31, 2012. The top tax rate will revert to 55 percent, the exemption will revert to $1 million and the portability provision expires.
While these changes apply to federal estate taxes, many states enacted their own estate tax legislation. The federal estate tax exemption increased to $5 million per taxpayer. However, the Illinois exemption is only $2 million (and the state has a top tax rate of 16 percent). In addition, there is no provision for portability under the Illinois estate tax.

What’s That Mean to Me?

Your gross estate may include the value of your home, personal possessions, investments, bank accounts, retirement plans, business interests and proceeds from life insurance you own on your life as well as life insurance on others for which you have the power to change a beneficiary or borrow against the policy. Someone with a home and retirement assets could be well within the federal estate tax exemption, but now could be subject to an Illinois estate tax.

Someone with a $3 million taxable estate may not be subject to the federal estate tax, but could face an Illinois estate tax of more than $167,000. And, with the state of affairs at both the federal and state level, there is little that is certain or predictable when it comes to “death and taxes.”

Where To From Here?

Estate planning is more than just minimizing taxes or making sure your estate is distributed as you want to your heirs. It’s a process designed to identify the best way to accumulate, preserve and protect your wealth by implementing a plan to meet all of your objectives. A well-prepared estate plan can help with lifetime management issues as well as assist you with passing on your assets at death.

A number of estate planning tools are available. It’s important to work with a qualified professional in this area. Your estate planning team may include an attorney, tax professional, trust administrator, insurance professional and financial advisor.
With a little foresight and planning, you and your team of experts can develop a tangible plan that provides the certainty of meeting your needs today and provides the flexibility to deal with uncertainty ahead.

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