A certified financial planner explains what the current proposal could mean and offers advice to family businesses preparing succession plans
In the wrangling over the tax-cut compromise, the estate tax provision has attracted special ire from Democrats. That's because the proposed tax rates are more generous to the multimillionaires and billionaires whose heirs pay estate tax than in any year of George W. Bush's presidency. If they become law, the new rates will ensnare far fewer wealthy families and small business owners, says Jonathan M. Bergman, a certified financial planner and vice-president at Palisades Hudson Financial Group, a fee-only financial planning firm in Scarsdale, N.Y.He spoke to Smart Answers columnist Karen E. Klein about the situation as it stood on Dec. 15. Edited excerpts of their conversation follow. Karen E. Klein: What does the proposal that just passed the U.S. Senate say in regard to estate tax? Jonathan M. Bergman: It sets $5 million as the exclusion rate for individuals and $10 million for married couples. Estates larger than that would pay 35 percent in estate tax. And 35 percent would also be the rate set for gift tax and generation-skipping transfer tax, which covers gifts to grandchildren. The other thing the proposed legislation does is grant portability. So the unused portion of a predeceased spouse's estate can be added to the remaining spouse's exclusion amount. In 2009, we had a $3.5 million exemption and a maximum rate of 45 percent, and we did not have portability. How does the portability provision work? If I died, and my estate used $1 million of its estate tax exemption, the remaining $4 million could transfer to my spouse and allow her to shield up to $9 million from estate tax on her death. If the legislation is not passed, and rates revert back to pre-Bush tax-cut levels, the exclusion is set to go down to $1 million and the tax rate up to 55 percent. So in comparison, this compromise is far more generous. Well, there was no estate tax at all in 2010. The heirs of Texas oil billionaire Dan Duncan and George Steinbrenner, who died this year, will escape estate tax altogether, because I highly doubt this pending legislation will be made retroactive to Jan. 1, 2010. There's a cost to dying in January, compared with this year. Unfortunately, in a macabre manner, we may find out on the last few days of this year how high that cost is. Sometimes you win, even when you die. But it is terrible public policy. Estimates show that only a few thousand Americans, very few of them small business owners, are wealthy enough to have to pay estate tax, after they have shielded their assets in trusts or passed them along over the years as gifts. How much do the rates matter in the bigger picture? Raising it to $5 million certainly broadens the exemption to a larger group. It's like a funnel: At $1 million, you're capturing a lot of people. At $5 million you're capturing far fewer people. I guess we're deciding how to define "wealthy." I'm not a huge fan of the estate tax, but I've always thought there would be an estate tax for very wealthy families. If you live in Metro New York or California, and you have an estate of $1.5 million, you're not necessarily extravagantly wealthy.