Thursday, October 21, 2010

Death and Taxes...It's a Good Year to Die

"Anyone may arrange his affairs so that his taxes shall be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone
does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands."
-Judge Learned Hand

As you may have heard, due to legislative gridlock, there is no estate tax in 2010. However, the estate tax is back with a vengeance in 2011. Unless Congress changes things, the estate tax will be at a rate of 55% for all estates above $1 million. Most folks who hear about this are probably thinking to themselves, “Surely you don’t mean that if I leave my family 11 million dollars, the government gets $5.5 million of it?” No, I don’t mean that (and stop calling me “Shirley”).

The Feds only get a hold of $5.5 million if you manage to pass all your wealth through your estate. So don’t feel bad if you didn’t die in 2010, you can leave amounts to loved ones through non-probate transfers (meaning these amounts aren’t part of your “estate” for estate tax purposes).

For example, one way to keep money out of your estate is the annual gift tax exclusion. You can give $13,000 per person, per year ($26,000 if you combine your spouse’s exclusion) without having to pay a gift tax. This is one way you can avoid the estate tax without even having to die (most people prefer this).

People like to talk about how high taxes used to be. For instance in the 1950’s the highest marginal income tax rate was above 90%. However, what they don’t say is that very few people paid this tax rate (thanks to numerous loopholes under the tax code). The same is true for the estate tax. With careful planning (and some good advice) the estate tax can be avoided. Like Judge Learned Hand said it isn’t your patriotic duty to pay the Feds. any more than required.