THE federal estate tax is scheduled to rise from the ashes on Jan. 1, and a lot more families may feel its bite unless Congress changes current law.
While there is no federal estate tax this year (2010), the tax is scheduled to come back next year, and apply to estates in excess of $1 million. To be clear, the amount of each estate that is exempt from estate tax is scheduled to become $1 million in 2011 (down from $3.5 million in 2009, when the tax was last in effect.) The tax on the balance is to rise to 55 percent in most cases (up from the 2009 rate of 45 percent). So now is the time to consider the various tax strategies available.
Last week, in their Retirement section, the New York Times outlined a few of the tax strategies you might want to consider now:
- Buy Life Insurance. You may want to buy a short-term policy sufficient to cover your tax bill should the exemption revert to only $1 million. The policy could be canceled if Congress raises that amount to a level that would exempt your entire estate. Caution: get legal advice on how to best purchase, own and pay for this policy to ensure it does not become part of your taxable estate.
- Remarry. If you are single and remarry, you will gain the estate tax advantage available to all married couples: you can leave an unlimited amount to your spouse estate-tax-free (provided they are an American citizen).
- Lend Money. Consider lending money to family members now, at an attractive (and yet tax-qualifying) rate of only 3.6 percent.
- Finance College Savings. Section 529 education savings plans are primarily a tool for financing education – your own or a family member’s. Earnings in the account are exempt from federal tax, provided the money is withdrawn to pay for qualified educational expenses. Caution: Consult qualified legal counsel before implementing this strategy, especially for grandchildren or great-grandchildren due to a quirk in the generation-skipping transfer tax which could cause all of the trust assets to be taxed when they are withdrawn.