In theory, the estate tax is an endangered species. The tax is scheduled to be phased out in steps until it disappears in 2010. So you might conclude that the time and money required for estate planning is a waste.
Tax specialists, however, say estate tax planning remains essential. Here's why:
Although the tax will be gone in 2010, your estate may be taxed if you die between now and 2010. In other words, unless your timing is good, Uncle Sam may grab part of your estate.
The estate tax will bounce back in full force in 2011 under the so-called “sunset” provision. This provision will reinstate the tax at its old maximum rates unless Congress votes to get rid of it once and for all. In that case, the estate tax jumps from zero in 2010 to a maximum rate of 55% in 2011. So if you die after 2010, your estate could really get soaked.
The federal estate tax phaseout won't keep states from taxing your estate, and it's unlikely many states will do away with estate taxes because they need the money.
Minimizing taxes is only one reason for estate planning.
“There are many other objectives of tax planning, such as keeping the farm in business and ensuring which heirs will get the farm,” says Parman Green, an ag business specialist at the University of Missouri.
Let's say, for example, that a farm is left to five brothers and only one wants to farm it. The rest just want cash. Without an estate plan, the brother who wants the farm may have to sell it to raise cash for siblings who just want the money.
One way to resolve this dilemma is an estate plan that leaves the farm to one brother and assets, such as stocks, bonds and the proceeds from life insurance, to the others.
Estate Tax Planning Isn't Free
Estate tax planning requires time and money. “It isn't free,” says Patricia Wolff, tax specialist for the American Farm Bureau Federation. “It requires paying accountants and lawyers, and buying insurance to cover any tax that might be due.
“But paying for these things could drain dollars from farm businesses that need every penny now to pay operating expenses,” she says. “That's why some people don't do it. If your electric and fuel bills are sitting there waiting to be paid, it may be difficult to justify the expense of estate planning.”