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The Past, Present and Future of Estate Taxes:
Things to Consider

In case you've been in a sensory deprivation tank since the '80s, you know that federal budget deficits have become staggering. In 2011, the United States is scheduled to spend $1.3 trillion more than it takes in. Furthermore, the current national debt as of the date of this letter is more than $15 trillion.

The debate is raging in Washington over how to solve the deficit problem. Lots of our representatives believe that a tax increase is inevitable. From a philosophical perspective, it's hard to argue that there's a tax more clearly associated with the rich than estate taxes.

The federal estate tax exemption - the amount that can be passed to kids without having to worry about estate taxes - for calendar years 2011 and 2012 is scheduled to be $5 million for a single person. For a married couple the exemption can be $10 million. The tax rate on the estate in excess of those amounts is a flat 35 percent.

If Congress and the President do nothing prior to the end of 2012, at the beginning of 2013 the exemption amount is scheduled to drop to $1 million, and the top estate tax rate will be 55 percent.

The IRS published statistics a few months ago about federal estate tax returns filed for those who passed away in 2007. What do the statistics tell us about estate taxes then and now?

  • Whether the exemption amount ends up being $1 million, $3.5 million, or $5 million, it shouldn't make a difference of more than about 25 percent in the amount of estate taxes collected for a given year.
  • Annual estate tax collections are not a big revenue number, relatively speaking, for the federal government. They represent about 2 percent of the budget deficit, and .2 percent of the national debt.
  • A smaller estate tax exemption will probably disproportionately affect the survival of family farms unless special protections are built in.
  • A smaller estate tax exemption will probably not disproportionately hurt closely held businesses.

Do these observations provide any assurance about what will happen with federal estate taxes? Unfortunately, no. Feel welcome to keep in touch with me so you can stay in touch with the latest federal estate tax developments.

My own reading of the statistics leads me to conclude that most people who should be worried about estate taxes don't have enough life insurance to help pay the tax bill. Even those who have made plans to pay estate taxes should have such plans reviewed to be sure they are effective and up-to-date.

As always, please feel free to call to discuss these of other financial security issues of concern.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your situation with a qualified tax or legal advisor. This material was prepared for use by LPL Financial advisors affiliated with Bay Financial Associates, LLC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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