Do your eyes glaze over at the mere mention of estate taxes? Mine do. Estate? What estate? I'm a middle class American with 2.3 kids (I give my cat a .3 because she's a big eater), and the term estate just doesn't figure into my everyday lexicon.
Besides, isn't the estate or so called "death tax" dead? Well, perhaps hibernating would be a more accurate description because it could come back to life like a vampire in January and suck more money out of our pockets.
Okay, that may be a little extreme, since even if it does come back, the estate tax will only suck money out of anyone who has an estate worth more than $1 million. Wait. That's all? So basically, anyone with a house, or small business, some retirement savings and maybe some life insurance, could qualify.
So maybe you should pay attention after all.
For those of you who may hot be aware of it or simply don't care, 2010 has been the first year since 1915 that we didn't have a federal estate tax thanks to the Bush tax cuts, which expire on December 31. Once that happens, we go back to a $1 million exemption and a 55% top tax bracket. Ouch.
Now you'd be right to point out that not that many of us even pay estate taxes and thanks to increased exemptions, the number of taxable estates has decreased from about 2% percent of adults dying in 2001 to less than a quarter of 1% last year. But things change.
Even modestly wealthy middle class Americans will be hit if we return to a $1 million exemption and higher rates. Like I said, it doesn't take much and your estate could go over the $1 million mark and it would be hit with a tax rate of 55%. Suddenly instead of getting $1 million, your heirs receive $450,000.
Get a GRAT?
Some financial planners are urging clients to set up what's called a "grantor-retained annuity trust," or GRAT, before it's too late. A GRAT allows you to give a portion of an asset's future profits to heirs tax-free.
The trusts, whose life span can be as short as two years, are popular with families that have assets expected to increase in value, such as a family business or depressed stock. Establishing a GRAT typically costs between $1,000 and $10,000, depending, in part, on the type of assets involved.
The reason financial planners are pushing this type of trust now, according to the Wall Street Journal, is that Congress is seeking to impose restrictions on GRATs. Most important, it would require that the trusts remain in place for a minimum of 10 years. Most observers say passage of the GRAT legislation is all but certain.
