The gradual phaseout of the federal estate tax has reduced the number of estate tax returns filed with the IRS by about 58% since the phaseout took effect in 2001.¹ The number of returns is almost guaranteed to fall again when the estate tax exemption rises to $3.5 million in 2009, and yet again when the federal estate tax is eliminated in 2010.

Sounds great, right? Not really. In 2011, the estate tax is scheduled to return with a $1 million exemption and a top rate of 55%. It’s unclear whether Congress will allow the full repeal to go on as planned in 2010 and let the estate tax come back in 2011, or whether they will craft some other outcome. Anything could happen.

What this means is that people with estate values that approach the exemption amount should consider whether their estate conservation strategies are up-to-date and ready for whatever legislative changes lie ahead.

Step by Step

• The first step toward any effective strategy begins with a will. This document will make your wishes known to the courts that will distribute your property during the probate process.
• Once you have a will in place, consider setting up powers of attorney for health care and property. These documents allow designated individuals to handle your affairs if you become unable to handle them.
• Next is to ensure that you have correctly named beneficiaries for your retirement accounts and life insurance policies. These instruments are generally exempt from probate and transfer directly to the designated beneficiaries.
• Once you have taken these steps, you are in a good position to consider whether you could benefit from a trust. A trust is essentially a legal entity that is set up to own your property. The person you name as trustee will administer the trust assets according to your instructions.

Some trusts can help reduce estate taxes and can place conditions on heirs who inherit your property. Others can be used to make charitable donations, to provide for family members with special needs, and to help prevent posthumous challenges from disgruntled parties.

The use of trusts can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.

With all the uncertainty in the air, staying on top of your estate strategy can put you in a better position to react to whatever Congress decides to do.

1) The Wall Street Journal, October 10, 2007