Well, here we are almost two-thirds of the way through the year and it appears more and more that, by default, Congress will redefine the definition of what it means to be wealthy in this country. Assuming Congress doesn’t act soon, on January 1, 2011 “wealthy” will mean any person who has the ability to leave more than $1,000,000 to his or her family and friends. Granted, on its face, $1,000,000 is a lot of money and few of us think that we realistically have the ability to leave that much when we died, but when you take a closer look at how that number is calculated, it’s surprising how many of us it includes. Generally the calculation includes any asset you have “dominion and control over” at the time of your death. The obvious things are bank and investment accounts and properties, personal property (e.g., vehicles, home furnishings, jewelry and collectables), and home equity (is there such a thing these days?). Then you have your tax deferred retirement accounts (IRAs, 401(k)s, etc.) and business interests. And finally, the one that surprises most people: the death benefit of life insurance.
If, when you add the value of all of these things together, the total is over $1,000,000, then 55 cents of every dollar over that amount will go to the U.S. Treasury. A couple of things make it even more painful. With life insurance, for example, it just doesn’t seem right that the death benefit should be subject to estate tax – after all, you never see a penny of it while you’re living. For business and real estate owners, the tax is levied on the value of the business or property. That means, unless there are other assets to pay the tax with (like life insurance), the business or the home may have to be liquidated. And then, if you have a qualified retirement plan, all of the unpaid income tax (at a rate of up to 35%) may become due at death in addition to the 55% estate tax.
The simplest strategy for avoiding the estate tax is to be sure to get rid of it all before you die, but that may be difficult to execute and, as might be expected, the government has devised ways to foil that strategy too. That said, there are other things you can do short of impoverishing yourself. In my next article I’ll discuss some of those strategies. Until then, enjoy your wealth.
