Dale Tudor: This Tax Could Affect You or Someone You Love

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01-01-2013: This Tax Could Affect You or Someone You Love
Sat, 11/17/2012 - 8:56pm
Posted by Dale Tudor

The current estate tax exempts the first $5,000,000 of your estate from taxation. For most of us, we are exempt.

As of 01-01-2013, the federal estate tax exemption drops to $1,000,000. And the rate climbs from 35% to 55%.

So, if you have a retirement plan with about $250,000 in it; a house worth about the same; and maybe a camp or woodlot worth about $100,000, plus your "stuff", worth maybe $50,000 and more than $350,000 of life insurance, then the "more" part of any of the above makes that amount elibible for the estate tax, as of January 1st. Many folks have more than $400,000 in their retirment plan, own a home worth $300,000 or more, and may have $500,000 or more in life insurance at the time of their demise. Say all of that for John Q. Mainer adds up to $1,300,000. The part past $1,000,000 would be estate tax taxable: thus John Q Mainer's heirs would owe the feds $165,000 (55% of $300,000).

How would Mr. Mainer's heirs pay for this? They'd likely sell the house and maybe the woodlot. But, since the estate tax is due nine months from the day Mr Mainer died, they might have to take less than the property is worth. Remember, they need the cash to pay the IRS, the collector of the estate tax.

Or they'd cash in the retirement plan. But it is subject to income taxes. Net result of this action: they's lose 25% or more of the retirement plan to state and federal income taxes.

And heaven forbid if Mr. Mainer owned a farm or a lot of real estate or business with some significant value or a lot of stocks outside of the retirement plan. That would drive up the taxable assets.

The estate tax, also known as the death tax, is horrible. It causes the heirs of John Q. Mainer or maybe of you and me into a forced situation where they have to sell or somehow exchange assets for cash, in order to pay the taxman, often resulting in more taxes (like the income tax mentioned above).

Happy New Year. And welcome to Obamanomics, in our not so brave but very new world.


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