In July 2004, the federal government was on pace to collect more gift and estate taxes for the year than were collected in 2003 — despite a reduction in the top estate tax rate and a higher exemption amount, according to Haver Analytics.
One explanation for the increase could be because the wealthy were benefiting from the stronger economy. Regardless of the cause, it’s important to remember that the federal estate tax remains a potential liability until 2010, when it is scheduled to be repealed — but only for one year.
Although some people believe that lawmakers will make the estate tax repeal permanent, it’s risky to postpone estate planning in the hope that this will occur. The long-term risk is that you could be unprepared if estate taxes return in 2011 as currently scheduled. Postponing important decisions about the distribution of your estate can carry some short-term risks as well. Before you take any specific action, be sure to consult with your tax professional.
Life insurance typically becomes more costly with age. If your plan calls for using life insurance to help pay estate taxes, buying it later in life means higher premiums or, worse, that your policy might not be approved if you have a health problem. The cost and availability of life insurance depend on such factors as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved.
You can give away assets during your lifetime to help reduce your exposure to estate taxes. Because the law limits annual gifts to $11,000 per person, it could take several years to move significant amounts to heirs without incurring gift taxes.
If you were to die without an up-to-date estate plan, it could leave surviving family members with major problems. Plus, there is no assurance that your wishes would be carried out.
Estate tax cuts are welcome news, but it would be naive to assume that they will last. If you have questions about your potential estate tax liability, please call for a review of your situation.
Don’t go there
Recently, a federal prosecutor announced a guilty plea by an individual charged with estate tax fraud. The guilty plea may well be a harbinger of a new “get tough” policy by the IRS in an area that up until now has not had a reputation for vigorous criminal enforcement, according to the law firm Schwartz, Manes & Ruby in Cincinnati.
The defendant in this case was the executor of her mother’s estate. She admitted that she intentionally omitted assets worth about $400,000 that should have been included in the estate. The executor could face a term of imprisonment, followed by a term of supervised release, and a large fine.
Individuals who stand to be affected by the new emphasis from the IRS include executors, tax return preparers and essentially anyone responsible for the completeness and accuracy of an estate tax return.
It is important to remember that old income tax returns and other documents that the IRS can obtain in an audit often will allow it to discover assets that have gone unreported.
The recently publicized guilty plea by an executor is a not-very-subtle warning by the IRS that estate tax fraud can have consequences beyond dollars and cents.