There was a typographical error in the last NOTES. The statement in the fourth paragraph that, unless Congress acts before January 1, 2001, on that date the federal estate tax will return with an exemption of $3,500,000 per estate, was incorrect. I am afraid the figure is wishful thinking on my part - the exemption amount will be only $1,000,000 per estate. The mistake is mine, and the computer did not do it - at least this time.
When you read this, the election results will be in and we may have a better idea of the future of income taxes and estate taxes. In the meantime, we can just guess and suggest some defensive measures.
Estate planners have a motto: "Taxes delayed may never be paid." The objective is to defer taxes to the maximum extent, because it may be possible to find a legal way to avoid the tax later.
In some cases, however, it makes sense to pay taxes now. The federal gift tax rate is 45%. If assets can be removed from the estate at a 35% rate, this may be better than paying 45% or 55% later. In addition, the gift tax paid is removed from the estate, thus further reducing the cost of the gift.
A grantor retained annuity trust, or GRAT, in which a donor retains the right to the income from the property for a term of years, is a good way to pass future benefits of property to one's heirs. Presently, a GRAT may be as short as two years. Congress is likely to change this to ten years, which will reduce its value as a tax planning tool. Thus, there is an advantage in establishing a GRAT now, before the law changes.
Until Congress enacts a federal estate tax law, we will not know for sure what we are dealing with. In the meantime, tax planning is essential, so that whatever Congress does, you will be prepared.
In future NOTES, we will be looking at various ways to reduce estate taxes. In addition, we will be dealing with other issues, such as provisions you ought to have in your durable power of attorney if you own property in Florida.
