"The horror... the horror...."
Ah, the unforgettable last words of Colonel Walter E. Kurtz (played by Marlon Brando), as Captain Benjamin L. Willard (played by Martin Sheen) dispatches him with "extreme prejudice" (with a machete, no less) in the closing scenes of "Apocalypse Now". What does that have to do with estate planning and the federal estate tax (aka "death tax")? Well, nothing really. Perhaps I just wanted to find a way to work it into this blog.
No, seriously, as you may recall in the last blog post (February 9, 2010), we left our friends Dick and Jane at the mercy of the present, uncertain state of the federal estate tax (or lack thereof). Oh, you don't remember the details? [I hereby incorporate the facts from that last blog post herein.] Go ahead and take a few minutes to review that last blog post, so you will be up-to-speed. We'll wait until you are ready.
Welcome back.
In his recently submitted budget proposal, President Obama is seeking to make the federal estate tax retroactive to January 1, 2010, with a $3.5 million estate tax exemption and a 45% tax rate. Were that to happen, just how "patriotic" could Dick and Jane become (i.e., how much would their estate tax bill run)? Naturally, the answer depends on the state of their estate planning (or lack thereof). In the last blog post, we considered three common estate planning approaches, to wit: (1) the No Estate Tax Plan; (2) the Automatic Estate Tax Plan; and (3) the Wait-and-See Estate Tax Plan.
No Estate Tax Plan: Under this approach, the entire $7 million passes to the survivor... without utilizing any of the estate tax exemption otherwise available in the estate of the decedent. Then, upon the survivor's death, only the survivor's estate tax exemption is available. Math: $7 million - $3.5 million x .45% = $1,575,000 to the IRS. Ouch!
Automatic Estate Tax Plan: Under this approach, the maximum estate tax exemption amount in the decedent's estate is directed to the "B Trust" for the survivor and descendants. Then, upon the survivor's death, the survivor's estate tax exemption is available as in the No Estate Tax Plan. Math: $7 million - $3.5 million - $3.5 million x .45% = 0 to the IRS. Perfectly "patriotic"! [Note: The US Supreme Court and the US Tax Court have consistently held that no American should pay one penny more in tax than owed!]
Wait-and-See Estate Tax Plan: Under this approach, the maximum estate tax exemption in the decedent's estate is directed to a QTIP Marital Trust for the survivor. Thereafter (before taking any benefits from the assets in the QTIP Marital Trust and before nine months after the decedent's death), the survivor may "disclaim" any or all of the assets in the QTIP Marital Trust. Disclaimed assets pass to the "B Trust" for the survivor and descendants. Then, upon the survivor's death, the survivor's estate tax exemption is available as in the No Estate Tax Plan and in the Automatic Estate Tax Plan. Math: $7 million - $3.5 million - $3.5 million x .45% = 0 to the IRS. Again, perfectly "patriotic".
As you can see, having No Estate Tax Plan can be the most expensive estate tax plan. According to lawyers.com, 60% of Americans have no estate plan at all. So, what is the state of your estate tax planning (or lack thereof)?
Okay, so you don't have more than $3.5 million. If President Obama's budget proposal passes with a $3.5 million estate tax exemption, then you are good-to-go, yes? Not so fast!
Check back for my next post, as Dick and Jane face a federal estate tax scenario under which estates greater than $1 million get socked with tax rates between 50% and 60%. How soon could that future become the present for Dick and Jane (and you and me)? Try January 1, 2011.
The horror... the horror....
Great post! Is the reason 60% of americans dont have an estate plan due to the fact that they dont think they need one? or simply their lack of knowledge? what has been your experience?
Posted by: James Campbell | 02/16/2010 at 06:45 AM
As you can see, having No Estate Tax Plan can be the most expensive estate tax plan.
Posted by: James Morgan - Puritan Financial Advisor | 08/10/2010 at 06:11 AM