Despite ardent vilification of the federal estate tax, it's unlikely Congress will actually drive a stake through its heart this year. Even if it did, that would not toll the bell signaling an end to your need for estate planning.
The estate tax as it now stands is a levy that hits only the wealthiest 2 percent of Americans who die each year. The rest are spared because the law ignores any amount you leave to your husband or wife or to charity, and up to $675,000 of assets left to others. That $675,000 cap is currently scheduled to increase gradually until it hits $1 million in 2006.
Mirroring the estate tax is the federal gift tax. The same tax-free levels apply, plus another one that allows you to give away up to $10,000 each year to any number of recipients without worrying about the gift tax.
The point of the gift tax is to keep you from dancing around the estate tax by giving everything away before you make your final exit. Taxable gifts made during your lifetime eat into the $675,000 worth of estate-tax-free transfers you're entitled to at your death.
President Bush has called for the elimination of the estate and gift taxes within a decade by gradually squeezing the tax rate until it disappears. A more likely outcome, we think, is that Congress will jack up the tax-free level to at least $2 million — and perhaps as high as $5 million — add extra breaks for small businesses and family farms, and cut the top estate-tax rate from its current voracious level of 55 percent, to 45 percent or lower. By the end of the summer, we expect Congress to have moved closer to a time when only the richest of the rich will have to worry about the estate tax.
Assuming you're not in that league, will the expected changes in the estate tax amount to an emancipation proclamation, freeing you forever from worrying about estate planning?
Sorry, but no. First of all, because changes are likely to be phased in over several years, you still want to do what you can to reduce the tax man's take in case something happens to you between now and then. This is especially crucial if your estate is already over or creeping close to the $675,000 level at which the tax kicks in.
Next week: the importance of estate planning.