The "Death Tax" Is Not Dead

The “Death Tax” Is Not Dead

You may have heard some quipsters joke that 2010 is a good year to die now that the estate tax has “disappeared.” Of course, this all depends on what Congress may or may not do to reinstate the estate tax.

All kidding aside, it is interesting to note that in this “topsy-turvy” world those who fought the longest and loudest against the estate tax, going so far as to rename the estate tax the “death tax” in order to get more political traction, have now decided to switch sides and fight to reinstate the federal estate tax. More than 40 business organizations are asking Congress to reinstate the estate tax at 35 percent on inheritances worth more than $10 million per couple. The groups have changed positions in a bid to head off what they believe could be an even higher estate tax.

Under current law, for persons dying in 2010 there is no estate tax on their estates. Thus an unlimited sum, even billions, can pass to the next of kin or other beneficiaries of a person dying in 2010 without any of the sum being taxed. However, unless Congress acts, current law would raise the tax next year to 55 percent on estates after they exceed $1 million per individual ($2 million per married couple).

What does this mean in practical terms?

According to the Tax Policy Center, about 1.7% of all Americans who die each year (44,000 estates) would accrue an estate tax liability in 2011 if the $1 million exemption remains unchanged by Congress. Raising the tax bar to $3.5 million shrinks the pool 85% to 6,400 estates. A $5 million estate tax exemption per individual ($10 million per couple) would cut that population in half again, leaving only the 3,500 richest estates owing anything to the IRS.

Looking at the estate tax in perspective we begin to understand that far too many people focus on whether the estate tax will be reinstated, and if so, the date the reinstatement will be effective (retroactively or prospectively). Unfortunately, focusing on these concerns has lulled some into complacency. Instead, they ought to be taking steps to consult with an elder law or estate planning attorney to determine whether they may be at risk right now.

Spouses Could Be In Jeopardy Under 2010 Repeal of “Death Tax”

For example, because there is currently no estate tax spouses could be in jeopardy; that is, the rule of “unintended consequences” put in motion by Congress may adversely affect some spouses. Standard language found in many estate plans could leave spouses with nothing. In 2009 and prior years, estates could pass a certain amount of assets tax free (up to $3.5 million in 2009). In addition, spouses could receive an unlimited amount tax free. To take advantage of these rules, estate plans often contain a “bypass trust” (or “credit shelter trust”) and a will with language in it that is designed to allow estates to pass without any estate tax. For example, your will may state: “I leave to my trustee the maximum amount that can pass free of estate tax and leave the residual to my spouse.” Because there is currently no estate tax, individuals who die in 2010 with this language in their estate plan will wind up leaving nothing to their spouses.

While Illinois, like most states, allows spouses to claim a portion of the decedent’s estate, even if they don’t receive anything under a will, this can be a time-consuming and expensive process. To ensure your spouse is covered, you should talk to an elder law or estate planning attorney.

This article is to be published in the April 2010 edition of the Southern Business Journal.

Habiger & Associates Elder Law Office (HAELO) provides legal services to elderly or disabled persons in Southern Illinois. The founder of the firm, Richard Habiger, is an elder law attorney with more than 30 years experience. We are an Elder Law and Life Care Planning Law Firm that provides legal and care coordination assistance, including: Medicaid planning; asset protection; estate protection; Medicaid applications; Medicaid appeals; VA pension benefits planning and applications for veterans and their surviving spouses; planning for those with Alzheimer's, dementia, or other forms of memory loss, and those who have suffered a stoke; Hospice planning; and special needs planning, including special needs trusts and supplemental needs trusts.

HAELO is located in Carbondale Illinois, and serves clients in twenty-seven Southern Illinois counties south of Interstate 70 highway. Southern Illinois Counties: Jackson County, Williamson County, Union County, Franklin County, Perry County, Saline County, Jefferson County, Hamilton County, Johnson County,  Randolph County, Wayne County, White County, Washington County, Edwards County, Monroe County, Wabash County, Richland County, Clay County, Marion County, Clinton County, Bond County, Fayette County, Effingham County, Jasper County, Crawford County, Massac County, Pulaski County, Alexander County, Pope County, Hardin County, Gallatin County, and Lawrence County.
Southern Illinois Cities & Towns: Carbondale, Murphysboro, Carterville, Herrin, Marion, Anna, Vienna, Metropolis, Harrisburg, West Frankfort, DuQuoin, Benton, Chester, Pinckneyville, Mt. Vernon, McLeansboro, Carmi, Fairfield, Nashville, Waterloo, Centralia, Salem, Albion, Mt. Carmel, Flora, Olney, Lawrenceville, Newton, Robinson, Jonesboro, Eldorado, Shawneetown, Ridgway, Sparta, Golconda, Johnston City, Marissa, Coulterville, Carlyle, Ullin, Tamms, Elizabethtown, Galatia, Wayne City, Cobden, Lake of Egypt, Goreville, Brookport, Olive Branch, Cave-in-Rock, Carrier Mills, Energy, Cambria, Zeigler, Royalton, Christopher, Rosiclare, Sesser, Okawville, Woodlawn, Thompsonville, Steeleville, Raleigh, Olmsted, Baldwin, Villa Ridge, Mounds, Tunnel Hill, Red Bud, Trenton, New Baden, Ewing, Dix, Norris City, Creal Spring, Bridge Port, Sumner, Waltonville, Breese, Aviston, Germantown, Whittington, Vandalia, and Ina.