Financial Abundance

Who would have believed that Congress would allow for the unlimited estate tax deduction to be implemented, allowing billionaire’s estates, such as George Steinbrenner’s, to pay no estate tax, if the billionaire dies in 2010.

For the rest of us, the lack of Congressional action on the estate tax could provide for a precarious future. Effective January 1, 2011, if your total estate, including your house, vacation home, cars, retirement savings, etc, totals more than $1 million, your  estate could pay 41% of the value of all of your property, exceeding $1 million, to the US Government.  The progressive estate tax rapidly escalates to 55% for estates that exceed $3 million.

Years ago, when the $1 million dollar estate tax exclusion was implemented, few American had an estate worth $1 million, billionaires were virtually unheard of and we would talk about the US government expenses and debt in millions or sometimes billions.  Today, billionaires are fairly common, virtually everything that our government does is in billions or trillions of dollars and there are millions of US citizens that have estates exceeding one million dollars

With the estate tax uncertainty that we face, it is important to know whether you may be affected by a return to the $1million estate tax exclusion.  The best way to do determine this is by developing a simple Net Worth statement.

On the left side of your Net Worth statement, list all of your assets.  Assets would include the value of your house, the value of any vacation property that you own, the value of your cars, the value of your personal belongings, the value of any retirement plans that you have such as 401(k)s and IRAs, the value of your business and the value of any other savings or investments.  On the right side of the Net Worth statement, list all of your liabilities.  This would include mortgages, home equity credit lines, business loans, remaining balances on car loans and any long term credit card debt.

After summing your assets and liabilities, subtract your total liabilities from you total assets to determine your Net Worth.  If you are single and your Net Worth exceeds $1 million, your estate will likely be required to pay estate taxes in 2011, if the current laws remain.

If you are married, perform the Net Worth exercise as a couple.  If your joint Net Worth is under $1 million and it is not expected to significantly increase in the future, a simple will should be sufficient.  However, if the joint Net Worth is over $1 million, but less than $2 million, with proper estate planning, the opportunity to avoid paying estate taxes exists.

When a spouse dies, the second spouse can inherit the full joint estate and pay no estate taxes.  However, if the joint estate is worth over $1 million or will likely be worth more than a million dollars in the future, the ultimate heirs may be required to pay estate taxes upon the death of the second spouse.  This may be avoided by proper estate planning, using devices such as a ‘bypass trust” that avoids all of your joint assets ending up in the surviving spouse’s estate.

For more information on estate planning, see Chapter 10 of my book, Financial Abundance Guide.  If you do not already have a copy, you may download a free copy of my book at www.financialabundanceguide.com

Hopefully Congress will modify the current law to increase the 2011 estate tax exclusion to $3.5 million, an exclusion amount that our president supports.  If so, individuals with estates less than $3.5 million and couples with estates less under $7 million can avoid the estate tax.  However, I find it impossible to predict what our government will do.  Who would have thought that Congress would give the estates of George Steinbrenner and other billionaires a “free pass” in 2010?

Unless your estate is much less than $1 million, I encourage you to call your estate planning attorney before the end of 2010 and determine if your will is written to minimize  estate taxes, even if the estate tax exclusion returns to $1 million in 2011.