Hurry Up and Die: Favorable Estate Taxes Timed to Sunset in 2011

George Harrison sang about the futility of avoiding death and taxes with this 1966 lyric:

“My advice to those who die, declare the pennies on your eyes … Yeah I’m the taxman, and you’re working for no one but me.”

The Beatles might not have helped the Internal Revenue Service’s reputation for gouging a person all the way to the grave, but a good estate lawyer can save an estate a substantial amount of coin.

Although there’s no way to completely avoid estate taxes there are several good ways to mitigate them. In particular, if individuals have a lot of assets to leave their heirs, it’s better to hurry up and die before Jan. 1, 2011.

Estate taxes are undergoing significant changes at the federal level. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually decreases the rate while increasing the value of the estate tax transfer exemption, also known as the unified tax credit, up to 45 percent and $3.5 million respectively, through 2009 (see chart, p. 21).

This means that lifetime transfers in excess of the exempt value ($1.5 million per person in 2004) can be taxed at the correlating rate (up to 48 percent in 2004), leaving more of an estate for heirs.

In 2010, the estate tax is repealed altogether. But the repeal only lasts a year. Beginning Jan. 1, 2011, the plan expires, or “sunsets,” and the estate taxes return to a maximum transfer exemption of $1 million and are taxed up to a 55 percent rate. That’s not far from the rates in 2002, which had a $1 million exemption and a 50 percent rate.

Estate planners agree that the tax will probably never be repealed completely. They say that Congress is likely to change the rules before 2010 because it would mean the loss of a great deal of money to the federal coffers. One report estimates an excess of $50 billion, but since people die at different ages and at varying levels of wealth, it’s impossible to put a true figure to the loss.

The U.S. Treasury Department reported $27.2 billion in gift and estate taxes were collected in 2002, while a mere $13.8 billion was collected in 1994.

“Arkansas’ estate tax is equivalent to the credit that the federal government gives for estate taxes,” said Chris Harris, a lawyer at Keith Miller Butler & Webb PLC. “However much the feds say to pay the state, that’s how much Arkansas takes.”

Since Arkansas depends on federal estate tax credit to help fund the General Revenue and the Economic Development funds, if there’s no federal estate tax, the state gets no credit. Steve Butler, partner at Keith Miller, said he believes the state would have to change the estate tax law before 2010 to keep from losing its share of those monies.

Arkansas collected $23.2 million from estate taxes in 1999, contrasted with $34.9 million in 2003. Again, these numbers may vary from year to year because more wealthy people may die in one year over another.

Butler said the key to estate planning at present is to build in flexibility.

“The taxable estate plans we’re doing right now are designed to take the client all the way up to 2010,” he said.

Harris said the primary vehicles estate planners use to minimize estate taxes start with maximizing use of the unified tax credit and gift ing assets, or creating a charitable remainder trust or charitable lead trust.

It’s Never Too Early

Butler said the most common misperception about estate planning is that people think there’s no need for forethought because their estate is too small. There are also those who believe they’re too young to worry, or that any remaining assets will automatically be given to a surviving spouse.

Butler said that’s not so, and not making any plan is the worst thing a person could do.

Greg Jones of Jones Jones and Doss in Fayetteville agrees. He said people tend to put it off as long as possible, for fear of dealing with the inevitable. But, he said, most people experience a greater peace of mind once the planning process is over.

Jones said that often it’s not the financial planning that clients get hung up on, it’s the person or people who will be elected to oversee the estate and children, if any.

Regardless of the size of estate, Butler said, proper planning is essential. He said the more assets an individual has, the more complicated the planning process may be, but that should not deter anyone from pursuing a legal plan — especially if minor children are involved.

“We’ve got an estate right now that’s been open well in excess of two years,” Butler said.

“We’re at the point now where we’re fighting over very little money.” The deceased, he said, was too vague when planning.

“That’s really what it’s about. Wealth preservation: Taking care of your kids or your grand kids or your favorite charity or your spouse and making sure you shield them, to the extent you can,” Butler said.

Baby Booming Industry

America’s largest demographic, the Baby Boomers, are getting older. And estate planners are getting ready for the world’s largest transfer of wealth to date.

Estimates on how much wealth will be handed down by the Boomers varies wildly, but the consensus is it’s in the trillions.

“There’s a lot of wealth getting ready to change hands,” Butler said.

Census data from 2000 shows that there are 56,429 people over the age of 45 in Benton County and 48,361 in Washington County.

That’s 104,790 in the two-county region alone who are close to the Boomer generation.

But it’s not just the aging demographic that’s made a good business out of estate planning.

“Almost every aspect of business planning involves estate planning,” Jones said.

He said when people interested in investing in a business venture come to his firm, they often have to consider their individual estate plans as they begin to form the business entity.

He sees a perfect example of good estate planning when limited liability companies, rather than individuals, and family trusts purchase property.

“That’s because they have set up an estate plan and they are moving that forward in their investments and their business life,” Jones said.

Jones, a Fayetteville native and Georgetown University law school graduate, said Northwest Arkansas’ wealth gives local estate planners the opportunity to practice innovative and cutting-edge planning, like what’s normally seen in markets such as California.

He said that the growth in Northwest Arkansas from a business perspective has grown the amount of estate planning he does annually and that business keeps looking up.

Tax Timetable
The following is a schedule of the Economic Growth and Tax Relief Reconciliation Act of 2001:

Year — Exemption — Rate

2001 — $675,000 — 55 %

2002 — $1 million — 50 %

2003 — $1 million — 49 %

2004 — $1.5 million — 48 %

2005 — $1.5 million — 47 %

2006 — $2 million — 46 %

2007 — $2 million — 45 %

2008 — $2 million — 45 %

2009 — $3.5 million — 45 %

2010 — NA — 35 %*

2011 — $1 million — 55 %

Notes: NA – Taxes Repealed. *Gift taxes only.

Source: Keith Miller Butler & Webb PLLC and The Financial Planning Association of Greater Cincinnati.