Estate Planning Guide
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R.I.P. estate tax ... maybe

Benjamin Franklin noted that life's only certainties are death and taxes. Most of the time, we just wait for them to intersect.

But unless Congress acts, the estate tax -- the federal law that connects these two inevitabilities -- will disappear, at least temporarily.

For some that could be a very good deal. For others, it could cost them money.

Should you worry about the estate tax or its impending demise? That depends. And is the law's expiration even a valid concern? Probably not, but the timing of its return could be an issue.

Since the 1980s, the amount of an estate that is protected from taxation has increased while the tax rate applied to the amount over the exempt threshold has fallen. In 2009, an estate worth up to $3.5 million will not face any federal tax. The value of estates over that amount will be taxed at 45 percent.

The temporary end in 2010

If the law enacted during George W. Bush's administration stands, when Jan. 1, 2010, rolls around, estates will not be taxed at all. That repeal, however, is slated to last just one year.

The estate tax will be back in 2011. Even scarier than its resurrection is that application of the tax will be at pre-2001 levels. That means that in 2011 only up to $1 million of an estate will be exempt from the tax. Assets in excess of $1 million will be taxed at 55 percent.

Anti-estate tax advocates say (jokingly we presume) the possibility of a tougher estate tax in 2011 will lead to "throw mama from the train" scenarios in 2010 where people or their families will make end-of-life decisions based on more favorable tax treatment.

Even the most cynical doubt there will be wholesale plug-pulling if the estate tax law continues as is. But the one-year repeal, or even the uncertainty about its repeal, is causing financial palpitations among taxpayers and their estate planners.

Get out your crystal ball

The top staff members of both tax-writing committees, Senate Finance and House Ways and Means, have publicly said they expect at least a short-term continuation of the estate tax next year. Tax watchers for the most part are taking them at their word.

"There's a very good chance that Congress won't allow the repeal to go into effect, that sometime before the end of the year they'll do something to prevent the repeal," says William E. Massey, senior tax analyst with the Tax & Accounting business of Thomson Reuters in New York City.

William Ahern, director of policy and communications at the Tax Foundation in Washington, D.C., is a bit more hesitant to predict action, at least any time soon.

"The conventional wisdom in the tax community is that a one-year repeal is intolerable and that the '09 law will be extended and made permanent," says Ahern. "But all the experts who say that will happen also are the ones who predicted that there would be some resolution of this long ago. But here we are, a quarter away from repeal of the estate tax."

What could happen

When lawmakers finally get around to stopping the repeal as most believe will happen, what might we expect?

"They could keep the exempt amount at the current $3.5 million level, which seems to be the conventional wisdom, as a stopgap measure for one year to buy time. And there's a good chance they'll keep the tax rate at the 45 percent level," says Massey. "But again, it's very hard to know what they are going to do, especially long term."

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That 45 percent rate is quite appealing, fiscally for taxpayers who might face the estate tax and politically for the politicians who set it. It's 10 percent lower than where it stood before the phase out began and where it will jump back to in 2011 if the law isn't changed.

And all the talk during the health care debate about surtaxes on the wealthy has prompted some to look at that prospect when it comes to estates. "There's a good chance we could see a surtax on estates at a higher level, say $10 million," says Massey.

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