Estate tax law has been a hot topic this year for the financial industry, but not many individuals are concerned about it because they assume it is a “rich person’s” problem, not theirs.
Congress let 2009 finish without taking any action to address the expiring estate tax law. No action in 2010 by Congress would mean that the estate tax will return in 2011, meaning an exemption of only $1 million – as opposed to the current $3.5 million – with the remainder being taxed at 55 percent. According to studies, approximately 44,000 estates will accrue an estate tax liability in 2011 if the exemption returns to $1 million. If it stays at $3.5 million, the number drops to 6,400 estates. Additionally, the repeal of the estate tax brings back the capital gains tax. More than 70,000 families will now face new capital gains taxes because of inherited assets. Leaving your heirs to pay a big tax bill may offset any good intent you had.
Individuals inherting assets are not the only ones affected. If you are a small business owner with no sucession plan, you may have an estate that will be taxed. If you have several insurance policies, they may add up to create an estate that can be taxed. If you own or have interest in valuable real estate property like a family lake cottage, you may exceed the $1 million exemption. These days, it’s not that hard to get an estate size of $1 million when you add together homes, life insurance and retirement accounts.