2004 is here, and with it some changes that may have a great impact on your current estate plan. Most of these changes are favorable, however, revisions to your plan may be necessary to prevent unintended consequences.

The most dramatic change for 2004 is the increase in the federal estate tax exemption to $1.5 million. In addition, the top marginal federal estate tax rate is decreased to 48 percent. Be aware that this increase in the exemption applies only to the estate tax. The allowable lifetime exemption for the federal gift tax remains at $1 million.

This is all part of the current tax law, which is raising the estate tax exemption in steps, finally reaching $3,500,000 in the year 2009. In 2010, the estate tax is repealed altogether, only to re-emerge in 2011 when the current law “sunsets.” In 2011, the exemption comes all the way back down to $1,000,000, with a top 55 percent marginal federal estate tax rate.

At this writing great uncertainty exists as to what Congress will do with this mess. President Bush and many Republicans support permanent repeal of the estate tax. Most Democrats and some moderate Republicans support a permanent increase in the exemption, but are intractably opposed to full repeal. Given the ever-increasing deficits, the war in Iraq and looming increases in the cost of Social Security and Medicare, it is anybody’s guess where this all shakes out.

Meanwhile, the states are not sitting back, waiting to see what happens in Washington. A little-known provision of the current law has eliminated a provision that required the federal government to share a portion of the estate tax with the states. A number of states have “decoupled” their state estate or inheritance tax from the federal statute. This means that an estate plan designed to take full advantage of the federal exemption may still have a tax imposed on the state level.

This presents a number of planning conundrums:

With the exemption now at $1.5 million, a married couple can shelter as much as $3 million from the federal tax.

This is accomplished through setting up a credit shelter or “by pass” trust at the death of the first spouse. Please note the estate may have to a pay a state estate tax on some portion of the property passing to the credit shelter trust.

The second conundrum: How do you plan your estate when you don’t even know what the rules are going to be?

One possible answer is to consult with your legal advisors about adding a “disclaimer” provision to your will or living trust. This will permit your spouse and/or executor to “wait and see” before deciding how much property to use in funding the credit shelter trust.

If it has been some time since you last had your estate plan reviewed, call your financial advisor and/or attorney.

He or she should review your current wills and trusts, the titling of your property and the beneficiary designations of your life insurance, IRAs and other retirement plans. Recommendations can then be made to structure your plan so that taxes can be kept to a minimum, while still keeping flexibility to the maximum.
Marc A. Pellerin is an associate vice president and investment advisor with Advest Inc. in Lewiston.