Next year could be a great year to die, at least from an estate tax perspective.
The federal estate tax exemption has increased from $2 million in 2008 to $3.5 million per individual (and $7 million per married couple) this year. Next year, the estate tax will be repealed in its entirety.
But in 2011, the exemption is set to drop back to $1 million per individual.
With the law in flux, many clients are taking a “wait and see” approach. But if the exemption drops again, these clients may be looking for ways to avoid the tax hit.
Attorney Mark A. Shiller recently advised a couple with a combined worth of about $3.2 million. The clients worked through a plan to help avoid estate tax in the short term, with an expectation that they would have to revise their plan in the future.
Once the law is clarified, “I expect they will come back and want to do some more work,” Shiller said.
Others agree that a change in the exemption will create more demand for estate planning.
“If it reverts back to $1 million, for many people, that will mean more aggressive planning,” said attorney Adam J. Wiensch.
That could mean more work for attorneys like Wiensch, who is a member of the Tax & Individual Planning and Estates & Trusts Practices team at Foley & Lardner LLP in Milwaukee.
According to Wiensch, if the exemption decreases, especially on the heels of a recession, individuals and families previously unaffected by the estate tax will need to reevaluate their plans.
There are two challenges, he said, “they don’t want the estate to have to pay taxes, but they also want to make sure they have enough to live out their lives in the style they’ve grown accustomed.”
Carol J B Hatch, chair of the State Bar of Wisconsin’s Real Property, Probate & Trust Law Section Board said that she is already advising clients, especially those with small businesses, that they may need to revise their estate plans if the law changes.
“Nobody wants to pay more taxes than they legally have to,” she said.
Given that business values have dropped, Wiensch said now is a good time to make adjustments that could help avoid an estate tax hit in the future.
He is encouraging clients to take advantage of a tax discount that allows them to “gift” stock to other family members as a way to transfer future appreciation in a business.
“As an added benefit for people who make gifts now, appraisals are low because the economy is so poor,” he added.
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