Today’s confusing estate tax picture caused one attorney to aptly remark that “anyone who says they know what is going to happen between now and 2011 is either clairvoyant or deranged.” Nevertheless, estate plans must still be made, so what should you do?

Unless Congress acts to remedy the situation, the federal estate tax exemption amounts and the top tax rates are scheduled to change over the next few years, making it tough to create an estate plan. The below table illustrates what the exemptions and rates will be for the next few years. Note that transfers to a spouse are typically free from tax.




These exemption amounts are per person. Therefore, for 2007 a husband and wife could each have up to $2 million before estate taxes would be imposed. Therefore, with proper planning, a couple with $4 million of estate assets could avoid estate taxes entirely. However, unless their estate plan is structured correctly to allow each spouse to utilize their individual $2 million exemption, this potential $4 million exemption could be lost and the couple limited to a total exemption of $2 million.

Also, keep in mind that in most cases, the death benefit of any life insurance policies will also be included in your estate asset value, so you may be closer to the maximum exemption level than you think.



The current estate tax system is obviously insane. However, this actually gives me some encouragement that even with our fractured political system, some sensible resolution must – and will be - found.

In the interim, how do you deal with this estate tax uncertainty? Some tactics being used  include:

Will and trust provisions giving beneficiaries power to make changes as laws and family circumstances change. Plans incorporating provisions for heirs to “disclaim” or decline part of their inheritance. Increased lifetime giving strategies Utilizing charitable giving to reduce estate values.

Most estate tax observers do not expect the estate tax to be repealed, but do think a compromise will be reached, with an exemption potentially ranging from $3.5 million to $5.0 million. However, there appears to be little agreement on where the tax rate itself might go, with estimates stretching from 15% to 40%.

One key item to watch as the estate tax rhetoric heats up in Congress is what will happen to “stepped-up basis.” Under current law, whenever you inherit an asset you get to use the value of that asset at the time of death as your new cost basis for determining gain or loss on a future sale. It no longer matters what the deceased individual actually paid for the asset. This feature has not only saved heirs many dollars in taxes, but also avoided the accounting nightmare that might otherwise result when heirs tried to research exactly what was paid for old investments.

Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.