Estate tax limbo ccurbs planning

October 19, 2009
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When people are mulling how to divvy up their fortunes after their deaths, tax considerations usually are low on the priority list, fundraising consultant Keith Hopkins said.

“When you look at donor surveys around the country, the tax implications of giving is way down their list. It’s not even in the top five,” said Hopkins, who runs Hopkins Fundraising Consulting in Ada.

“When people decide where they’re going to end up making their legacy gifts, it goes to one of three places: heirs, Uncle Sam or charity. It’s been my experience from working with lots of donors (that) Uncle Sam is No. 3 on the list.”

Today the estate tax is in limbo, as the sunset provisions of the tax-cut law passed during the Bush Administration are about to go into effect, absent congressional action. That means the estate tax is completely eliminated for 2010, but in 2011 would jump back up to pre-2001 levels: 55 percent on the value of estates more than $1 million.

For 2009, the estate tax exempts from taxes the first $3.5 million of an inheritance for an individual, or $7 million for a couple, at a top rate of 45 percent.

As part of a Republican effort to dump the estate tax altogether, Congress enacted a compromise that gradually altered the rules until the tax disappears for 2010 only. Further attention from Congress would be required to avoid reverting to 2001 standards.

The Obama Administration has signaled support for retaining the estate tax for 2010. But with health care reform snaring the attention of D.C. politicians, any moves on this tax are still to come, said Tom Kyros, a partner at Varnum Law and former president of the West Michigan Planned Giving Group.

“We’re still on the same trajectory we were placed on in 2001 when the tax bill passed that was going to repeal the estate tax,” Kyros said. “If nothing changes, next year there will be no estate tax whatsoever.

“The prevailing wisdom is there’s not much time for there to be any major tax legislation this year, with health care and everything else going on in Washington,” he added.

He said the best bet now is that Congress will enact a “patch” to keep the tax in place for next year until it has time to figure out what to do.

“Studies seem to suggest that change to the estate tax law hasn’t adversely impacted charitable giving, gifts at death,” Kyros said. “People don’t jump out and change their estate plan every time the estate tax law changes.”

The current president of the West Michigan Planned Giving Group, Todd M. Jacobs of Ferris State University, said the donors he works with are not overly concerned about the uncertainty of estate taxes. Many of those donors add bequests for FSU to their wills and may not have estates large enough to fall under estate tax rules, he said.

“For those individuals, it doesn’t change the scenario very much,” Jacobs said. “I think for folks that have more complex estates, you’re dealing with a changing, evolving planning consideration.”

Hopkins said people object to paying an estate tax on assets on which they’ve already paid taxes, such as capital gains, property or sales taxes.

The estate tax garners much of its opposition from family business and farm organizations, Kyros noted.

“Most of my business-owning clients are obviously not big fans of this tax,” he said. “It’s a real burden on trying to figure out how to prepare a plan to transfer assets worth, say, more than $3.5 million but no liquidity to pay off Uncle Sam.”

Examples include family farms, family-held businesses and valuable lakefront property that may have been in the family for years.

“I certainly have clients who say they don’t want to give it all to the government,” Kyros added. “That might motivate them to make charitable gifts to avoid that tax. There are also plenty of philosophically minded people who don’t think about the estate tax.”

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