More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Nearly 15 million U.S. households—or 12.5%—would have a potential tax liability if Congress fails to act when the extension to the Bush tax cuts expires on Jan. 1, and the estate tax law reverts back to $1 million and 55% maximum tax, according to a just-released analysis by LIMRA.
LIMRA analyzed data from the Federal Reserve Board’s Survey of Consumer Finances to identify vulnerable U.S. households if the current estate tax law expires.
Robert Kerzner, president and CEO of LIMRA, said in a statement announcing the analysis that the “uncertainty that has surrounded our estate tax laws has made it impossible for Americans to plan for a reasonable transition of their assets to the ones they love and to charity for the greater good."
According to LIMRA’s analysis, only 4.4% of households have financial assets greater than $1 million. However, other assets are included in estate tax calculations, including real estate (primary residence and other properties), privately held business interests and the face amount of life insurance. Therefore, a much larger portion of the American population could be affected.
The three proposals Congress is most likely to consider are:
- Let the estate tax law revert back to $1 million and 55% maximum tax;
- Extend the current law with $5 million exemption and 35% maximum tax; or
- Enact a compromise of $3.5 million exemption and 45% maximum tax.
Joseph Thorndike, contributing editor with Tax Analysts, told AdvisorOne in an email message that he doesn’t foresee the liklihood of “full repeal” of the estate tax, but he also doesn’t believe there will be “a reversion to the pre-Bush estate tax, either.” What's most likley to happen, he says, is that Congress will extend the current 35% rate and $5 million exemption this year.
According to LIMRA’s analysis, if Congress fails to act, 14.7 million U.S. households would have a potential estate tax liability, with the average tax due for these families being $1.4 million. While households can use life insurance proceeds on the deceased to pay the estate tax, LIMRA analysis indicates that 55% of these households do not have enough coverage to pay the tax. On average, these households would still owe $1.6 million.
If Congress extends the existing law, 2.4 million households (slightly higher than 2%) would have a potential estate tax liability. At a 35% tax rate, the average tax would be $2.4 million. LIMRA’s analysis shows that 43% of these households do not have enough coverage to pay the tax. These households would still owe, on average, $3.1 million.
If Congress agrees to the compromise of $3.5 million exemption and 45% tax rate, 3.6 million households (slightly higher than 3%) would have a potential estate tax liability, LIMRA says. The average tax owed for these families would be $2.6 million. According to LIMRA’s analysis, 53% of these households do not have enough coverage to pay the tax. On average these households would still owe $3 million.
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