Plan to Protect Your Estate's Assets

The good news is that the top estate tax rate will tick down another percentage point to 49 percent in 2003. The bad news is that this is about the only bright spot in recent developments concerning the estate tax. Despite the scheduled phase-out and repeal of the estate tax, the need for estate planning may be as critical now as ever. One survey found that 51 percent of family businesses would have difficulty surviving the principal owner’s death because of the estate tax.

Consider these recent developments.

Ability to Protect Estate Assets Unpredictable

Not in My State

While the federal estate tax is slowly (and perhaps temporarily) being phased out, at least 16 states and the District of Columbia are severing the link between their state estate tax and the federal levy. Because most states assess their estate taxes as a percentage of the federal estate tax, the federally scheduled phase-out will potentially cut revenue to state coffers. More states are expected to keep their estate taxes alive.

One danger is that heirs who manage to avoid federal estate taxes altogether may not realize that an estate owes the state estate tax, which could result in penalties and interest until the tax is paid.

Not on My Watch

In June, the Senate voted against permanent repeal of the federal estate tax. Under current tax law, the amount of an estate that is exempt from estate taxes will slowly increase until reaching $3.5 million in 2009, and the top estate tax rate will slowly decrease until it is eliminated in 2010. However, the repeal lasts only one year. The Senate’s vote means that barring some future congressional action, the law will expire on December 31, 2010, and the federal estate tax will be reinstated at pre-2002 levels.

Trusts and Other Plan Strategies still Useful

One Other Bright Spot

Estate taxes generally can be avoided or greatly reduced with the proper planning. Several methods exist for business owners and high-net-worth individuals to preserve more of their assets for heirs. Depending on the specific circumstances, family limited partnerships, certain types of trusts, and asset transfers during your lifetime are among the possible options.

The use of these approaches can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.

A majority of business owners probably would love to see the estate tax finally die. With so much uncertainty, the most prudent strategy is to seek out the appropriate estate planning tools for your situation.