When I taught basic money management at the adult-ed center a section of the class was devoted to estate planning where a good friend and client explained wills and trusts. He is an attorney who specializes in this sort of thing and the folks who attended got the real deal. The reason I bring it up is that the estate tax code is now at an awkward stage. We’ve never faced this before because no one knows what’s going to be the permanent exemption and the Federal estate tax. In 2009 the tax on an estate did not kick in until the estate exceeded $3.5 million. This year, 2010 there is no estate tax even if the estate is worth billions because Congress did nothing to either continue the same- old- same- old or create a new tax. But if a rich loved one hangs in until January 1, 2011 the estate tax only allows $1 million of exemption down from the $3.5 million that was enacted under the Bush administration. Today you need a scorecard to keep up with the cost of dying but it also translates to a whole lot of money starting next year for the Federal government if nothing is done to keep the 2009 rates and exemptions or institute new ones.
You’d think with the kind of stock market and real estate years we recently had that a $1 million estate would be a rarity but when you add up the values of homes, cars, savings and the odds and ends collected over a lifetime you too could be a millionaire.
The 2011 estate taxes on the excess over a million dollars would make Knuckles Kowalski green with envy. The maximum estate tax the government will be charging will be 55%. Remember that most of the assets a person has accumulated already have been taxed at least once and in some cases several times before the final indignity when the government steps in for one last time.
The inception of the estate tax came about in 1797 when the US navy needed to rearm and required the purchase of Federal stamps for wills and estates. It was finally dropped four years later. In 1862 a direct tax on estates was enacted to help pay for the Civil War. Today the estate tax exists because, according to social historians, it is a means of redistributing income.
Today estate planning experts are at odds on what to do to cope with this mess with no tax in 2010 and back to the medieval tax-days if nothing is done in 2011. Congress hasn’t given a clue as to what they will do and so the best recommendation for someone caught in-between is to do nothing regarding estate planning until a clear direction is presented. President Obama has signaled he would like the exemptions to remain at 2009 levels.
In the meantime lawyers are setting up Trusts and people are implementing them with little knowledge why except that it is something responsible grown-ups do when they reach a certain age. It’s like drinking prune juice, at some point it’s supposed to be good for you whether you like the taste of it or not.
The reasons given to set up a Trust by the pro-Trust folk, which include estate planning attorneys and bank Trust departments, is that by having a Trust an estate (1) avoids probate (2) avoids guardianship or conservatorship and (3) keeps things private.
The arguments against establishing a Trust include: (1) Set-up costs are high (2) Funding is a pain and most people are not aware that they need to do it (3) People still need a Last Will & Testament and finally, (4) Most of us really don’t need a Trust.
A great many families can manage on a simple Will and designating proper beneficiaries on their bank and investment accounts. A lawyer can also explain a Quick Claim Deed on real estate and whether it is applicable to a family’s situation.
Remember I am not a lawyer or practicing estate planner and you should always contact your attorney or tax professional before making any decision regarding your estate.
If you have any questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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