Will the Estate Tax Be Resurrected?

When the unknowable meets the possibly very expensive, it pays to plan ahead

A BURGEONING FEDERAL budget deficit may force the early expiration of a tax law that has cheered business owners for years. But experts say early planning may blunt the pain.

A provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 calls for the repeal of the federal estate tax as of Dec. 31, 2009, says Christine Pronek, a manager in the Estate and Trust Group in the Bridgewater office of Amper, Politziner & Mattia. The levy which opponents deride as the "death tax," is scheduled to be resurrected as of Jan. 1, 2011.

However, "the pressure to trim the federal budget deficit means that Congress is likely to revise the law to keep the tax in force through 2010 and beyond," Pronek says.

The estate tax is an assessment based on the value of assets owned by individuals at the time of their death. While $2 million of each individual's net taxable estate is generally exempt from the tax, the remainder is subject to a 47 percent federal tax rate. New Jersey generally exempts up to $675,000, and taxes the rest at up to 16 percent.

Pronek warns her clients, who include the owners of small and medium-sized businesses, not to bank on the planned 2010 repeal of the federal estate tax. For one thing, if it does happen, the repeal will only be in effect for the year 2010.

"The uncertainty of the federal estate tax system shouldn't stop a person from engaging in estate planning as a way to minimize their tax liability" she says. "All estate plans must be tailored to the respective individual's needs, but one frequently used approach is to include qualified disclaimer provisions in a will."

Pronek says qualified disclaimers provide flexibility for the surviving spouse to decide how much of the federal estate tax exemption should be held in a trust-commonly referred to as a credit shelter trust-and protected from being taxed as part of the surviving spouse's estate when he or she passes away

"This flexibility is key to New Jersey residents since the state of New Jersey has an exemption amount of only $675,000/' Pronek says. "With the disclaimer language in the will, the surviving spouse can decide if he or she wants to pay some state estate tax upfiont on the decedent spouse's estate, instead of taking a larger state estate tax hit on the surviving spouse's estate when that person passes.

"Regardless of the future of the estate tax," Pronek adds, "there's one piece of advice that won't change: Meet with your tax or other adviser early so you can plan effectively and be well prepared for the unknown."