• 22
  • September
    2010

As you may have heard, 2010 is an odd year regarding the federal estate tax. The tax is due to increase on January 1 unless Congress passes new legislation. Deborah L. Jacobs of The New York Times wrote a great piece on some helpful tips no matter Congress's disposition.

First, here is a little bit of a background on the estate tax and its changes. In 2011, $1 million will be the estate amount exempt from the estate tax. The same exemption was $3.5 million in 2009. The tax on the difference between the total estate amount and the exemption in 2009 was 45 percent. The tax will rise to 55 percent.

There is a difference between strategies that can be impacted by Congress's decision to allow the estate tax to increase and those actions that will not be affected. Here are a few applicable tips that can be advantageous even if Congress acts to improve tax rates.

Lending money to a family member can be beneficial. To avoid potential gift tax and income tax implications, the lender has to charge a minimum rate of interest each month. That rate must at least be the minimum rate of interest set by the United States Treasury.

Buying a one or two year term life insurance policy to cover the tax bill after the exemption can also be helpful. Beneficiaries must own the policy otherwise the gain from the policy will be regarded as a part of the estate and therefore taxed.

Putting money in a section 529 education savings plan can also be a good idea. Additional money to finance education is generally beneficial. Income derived from the account is exempt from federal tax as long as the money is used for college tuition or other college related expenses as defined by section 529. If the account is not used for education purposes it is subject to a 10 percent penalty and subject to income tax.

Decisions about estate tax strategies should be discussed with an experienced estate planning attorney.

Source: The New York Times, "Devising Strategies While the Estate Tax is in Limbo," Deborah L. Jacobs, 9/15/10