Dealing With The Estate Tax

October 28, 2002
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GRAND RAPIDS — So where do we stand nearing the end of the first year in Congress’s 10-year slowly fading, suddenly reappearing federal estate tax program?

According to Lena Abissi, a CPA with Culver, Wood and Culver CPA, people with modest estates — particularly those who own and operate businesses of modest size — should prepare for the worst, and meanwhile hope for the best.

In its tax legislation last year, Congress adopted a 10-year phased repeal of the federal estate tax, while also progressively lowering its rates and raising its unified credit levels.

But then in 2011 the old Federal Estate Tax reappears in its original form with a $1 million unified credit (originally scheduled for 2006).

The rate reductions in the tax also will disappear in 2011.

And what this means for families here, Abissi says, is that for estate planning purposes, one is best off assuming that the original New Deal-era wealth redistribution law is in effect.

Abissi is a New Jersey native who’s been in practice 18 years — 12 of them with Culver, Wood and Culver.

And she said a family prepares for the worst either by creating an estate plan or, if one is in place, by checking with professionals on a regular basis that an existing plan still conforms to the changes in one’s life.

She told the Business Journal that when Congress raised the estate tax exemption to $1 million effective this year, the action may have lulled a great many people into believing the issue no longer would affect them.

But she said that one of the major problems in dealing with estates is that they often are worth considerably more than the owners assume.

The problem simply is that estates often are far more complex than their owners and creators understand.

For instance, Abissi noted, people are only half right in believing life insurance proceeds to be tax-free. Life insurance is, indeed, tax-free as far as income taxes are concerned. But she noted that a large life insurance policy can push the value of an estate to a federally taxable level, at which point the IRS moves to the head of the line of heirs.

As an example, Abissi noted that if heirs happen to inherit a family business while also receiving the proceeds of, say, a $500,000 insurance policy, they might find the estate liable to federal tax.

“Then the problem becomes whether you sell the business,” she said. “Or do you pay the tax out of the insurance and keep operating the business? In some cases, insurance is used to pay the tax.”

But again, she said, it depends on the situation and the family. If the heirs aren’t business people, selling a business to pay estate tax can be a worse-than-thankless task. Federal law gives an estate nine months to pay off its tax liability, and the closer to that deadline, the greater the likelihood that it will be necessary to sell the business at garage sale prices.

Abissi says the if-and-when nature of the federal estate tax repeal, and then its 2011 reappearance, makes estate planning fairly complex but, above all, essential. And the federal treasury isn’t the only player to be considered.

“You may have worked a lifetime to accumulate assets, and you have the right to determine how they’ll be distributed,” Albissi said, “but you have to say how you want them distributed.

“And if you don’t say what you want — if you don’t have an estate plan and, say, a businesses succession plan — the state has one for you.”

She explained that in the absence of an estate plan, the probate code of the State of Michigan determines how an estate’s assets are distributed.

“Your spouse might not like it,” she said, “and your children might not like it, and the church you were going to give such-and-such to might not like it, but that’s the way it is.” And she indicted that the state’s probate code really doesn’t care whether the estate becomes liable for federal taxes.

She said such issues rarely arise in the case of very wealthy people who retain accounting and legal professionals to keep their estate plans current, using personal trusts and charitable trusts to avoid estate taxes.

“The problem is with people who just don’t realize how big their estates are,” Abissi said. “If they arrange to meet with a professional and have a discovery and fact-finding, they often realize there are situations they have forgotten, or never thought about, or that things have changed.”

She said the process can be uncomfortable. “It makes you face some questions that aren’t pleasant. Nobody wants to talk about dying. I don’t want to talk about dying, but it’s something you’ve got to do.”

Likewise, she said, professionals deem it wise to plan for their own disability, given the possibility of serious injury or the onset of a debilitating illness such as Alzheimer’s disease. “You may need to select a conservator.”

The main thing, she said, is that most people don’t want their heirs to go from the funeral service to the courthouse to start fighting over the distribution of the estate.

“Every estate is different,” she said, “and each one has to be planned accordingly. And the other thing is that you can’t put together an estate plan, stick it in a drawer and forget about it. Things change and you’ve got to keep your plan up to date.”

She said that if some political magic wand were to wave and make the federal estate tax disappear tomorrow, the need for careful planning would not change.

“In fact,” she added, “the situation might be even worse, because then the capital gains tax comes into play.”  

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