Articles

Planning in Anticipation of Possible Estate Tax Repeal
By: John C. DeFalco
As we approach the November elections, it appears likely the estate tax will change in some way or form no matter who gets elected into office. The question arises, how do individuals plan their estates under such uncertain circumstances? One thing appears certain, under either bill, the phase-in of a repeal would be gradual. Perhaps over a ten-year period, with the elimination of the 55% and 53% tax brackets and the 5% surcharge, and an annual reduction in rates each year until the tax is finally eliminated in 2010.

Under current law, the income tax attributable to appreciated assets vanishes at death because the assets receive a step-up in basis to fair market value. The proposed changes to the estate tax would only permit a partial step-up in basis as follows; $1.3 million of transfers to any beneficiary would receive a basis step-up. An additional $3 million of transfers to a surviving spouse also would receive a step-up. The executor would choose which assets receive a step-up. This provision would permit a married couple to transfer approximately $5.5 million estate tax free.

Gifting of assets during the phase-in period could get rather complicated. It might make sense for an individual who has a life expectancy which is shorter than the period remaining until the repeal is fully implemented to use the new exemption to make lifetime tax-free gifts of assets with high appreciation potential. If these assets are retained, the appreciation could be subject to estate tax if the individual dies before the repeal is fully implemented. Let's also consider if the individual survives until the repeal is implemented, they would have given away assets that would have qualified for a step-up in basis under the $1.3 million or the $3 million rule. The donees of the gifts will get a carryover basis.

It has now become more important than ever to maintain records of basis. This will require a record of original purchase plus improvements on assets such as real property. From the executors standpoint, these records will be critical so that the proper assets could be selected which would be most benefited by a step-up in basis.

Through a well thought out gifting program and a strategically designed estate plan which is properly coordinated with your income tax situation, investments and risk portfolio, we can maximize wealth transfers even in such an uncertain environment.

Please contact your Sheehan Service Partner to discuss how we may assist you in achieving your financial goals and preserving your estate.

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