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Millionaires aren't impressed by estate tax reform

Most of the nation's millionaires believe that the repeal of the estate tax will leave them paying less, but few are ready to change their estate plans, says a recent survey.

"They know that the law leaves the future open with its sunset provision."

Over the next eight years, the estate tax will be gradually reduced, both by cutting the tax rate and by increasing the exemption levels. In 2010, the estate tax will be completely repealed, but heirs will be subject to capital gains taxes on any inheritance that they sell. Unless the repeal is ratified by a 60-40 vote in the senate, the estate tax will automatically spring back into effect in 2011.

According to a 2001 survey of "high net worth individuals" — defined as those who have more than $1 million in assets, not including a home, above and beyond their debts — conducted for The Phoenix Cos. Inc., 64 percent said they believed the new legislation would decrease their taxes, but an additional 30 percent thought the law would either have no impact on their estate taxes or cause their taxes to go up.

"This group is knowledgeable about the tax law changes, but they are not responding with dramatic changes in their estate plans," says Walter Zultowski, senior vice president of marketing and market research for Phoenix Life Insurance Co. "They know that the law leaves the future open with its sunset provision."

According to Zultowski, these provisions have left many millionaires uncertain about what the future of estate planning holds, and most are choosing to sit tight with their current inheritance plans.

The 2001 survey (which has not been updated) also found that of high net worth individuals:

  • 47 percent plan to consult a financial advisor about estate planning.
  • 41 percent plan to leave existing trust funds in place.
  • 33 percent plan to either increase or maintain their plans for charitable giving.
  • 33 percent plan to either increase or maintain their plans for tax advantaged giving to their children.
  • 26 percent will leave existing life insurance policies in place.
  • Less than 5 percent plan to drop life insurance, terminate their trusts, or decrease their giving to charities or children.

"I think the big change you will see is that people will pay more attention to estate planning in a broader sense — more than just paying for estate taxes," says Zultowski.

The findings about the effects of the estate tax changes are a selection from Phoenix's annual wealth management survey.

Family-Owned Business Deduction (FOBD)
was repealed in 2004

One key change has already occurred as the Family-Owned Business Deduction (FOBD) was repealed in 2004. Recapture rules do continue to apply until either the recapture period expires or the recapture tax is triggered. This deduction provided that up to $1.3 million in value of a qualified family-owned business may be excluded from the estate for estate tax purposes. At first glance, this repeal seems not in keeping with Congress' goal of reducing estate taxes. However, the amount of the family-owned business deduction, when combined with the exemption amount, is limited to $1.3 million. Since the exemption amount increases to $1.5 million in 2004, the allowable deduction would have decreased to zero. As a result, Congress concluded that there was no longer a need for the deduction. Given the complex requirements for qualifying for the deduction, this is a good result for taxpayers.


State death tax credit also repealed

The state death tax credit was also repealed effective for those dying after 2004, and replaced with a state death tax deduction. The repeal of the state death tax credit will have no immediate effect on most estates, since Alaska's death tax is written in such a way that it only applies if the estate qualifies for the federal credit. The repeal of the federal credit will effectively repeal the state taxes. But do not be surprised if Alaska, or other states, revise their laws to impose their estate taxes even if the credit is no longer available. The result will be a net tax increase for estates located in those states.

Because the estate tax remains in effect until the end of 2009, it is not recommended that individuals immediately revise their estate plans to take advantage of its repeal. Since we all have a chance of dying before repeal takes place, it is necessary to have an estate plan that is designed to minimize the estate tax. In the end, there exists tremendous uncertainty regarding estate and transfer taxes after 2010, and now more than ever, careful analysis is needed by individuals planning estate transfers.

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