Can They Take My Retirement? Basic Asset Protection Explained

Over  time we accumulate assets. We borrow money to buy a home and repay it.  The home usually appreciates in value (except for recently). Some of  us buy CDs or stocks, bonds, and life insurance. Or we contribute to an  individual retirement account (IRA) or a 401k.

These assets can be protected from creditors to some extent.    Continue reading

Federal Estate Tax Exemption Continues as Guessing Game

Get ready because estate taxes are about to change. Again. Perhaps dramatically.

Over  the years, federal estate tax exemptions have consistently been  inconsistent. In 2001 for example, the exemption was $675,000 – meaning  that every dollar more than $675,000 inherited from a non-spouse would  be subject to the tax. The exemption steadily increased each year, up  to $3.5 million in 2009, and then in 2010 there was no estate tax – the  exemption was unlimited. However, there was a catch: the exemption was  set to sunset, lowering to $1 million in 2011.

Just  days before that was about to happen, Congress stepped in and passed the  Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation  Act of 2010, which increased the estate tax exemption to $5 million.  This meant that any estate worth less than $5 million would be exempt  from the federal estate tax. (At the same time Congress also increased  the gift tax exemption, which is the amount someone can gift tax-free  over his/her lifetime, and lowered the marginal gift and estate tax rate from 55 percent to 35 percent.)

Again,  there was a catch: the $5 million exemption that is now in effect,  will sunset on Dec. 31, 2012. Unless Congress passes a new law, the  estate tax exemption will lower to $1 million on Jan. 1, 2013 (and  the marginal estate tax rate will increase back to 55 percent).

The  last time Congress was faced with an estate tax exemption about to  expire – the end of 2010 – it increased the exemption, albeit for only  two years. That time, the mid-term elections had passed, and Barack  Obama was two years into his presidency.

This time, while we wait to see what Congress does, congressional elections and the  presidential election are fast approaching. Estate taxes will likely  be one of many campaign issues, although there has been little  discussion about it in Congress to date. And the presidential  candidates have made little mention of it either, making a lot of folks  nervous that Congress will allow the $5 million exemption to expire, in  favor of the $1 million exemption.

The  wealthiest few – figuring that Congress won’t extend the $5 million  exemption and 35 percent estate tax rate – have already taken advantage and  made substantial tax free gifts in order to lower the value of their  estate.

For  the other 99.9 percent for whom gifting may not be so wise, things are  complicated because nobody knows what Congress will do. If Congress  votes to renew the current scheme, then nothing will have changed. On  the other hand, if Congress does nothing, and the exemption sunsets to  $1 million, a substantial number of inheritances will then become  subject to the tax. The other possibility – the more likely scenario –  is that Congress compromises and sets the exemption somewhere between $1  million and $5 million. That scenario will affect some estates, but  not others. But until that happens, taxpayers are left scratching their  heads wondering what it will be—and how to plan for the unknown.