With the changes in estate tax laws promulgated by Congress last summer, legislators have effected the ultimate concept in estate planning.  Under the new rules, which went into effect immediately, the estate of a taxpayer who dies in 2010 is completely exempt from tax. That's right; an estate of any size is completely exempt from taxation if the taxpayer passes away during calendar year 2010.  The word is, wealthy-but not so healthy-U.S. taxpayers are already inquiring about the availability of euthanasia in some European countries, just to ensure their demise coincides with the narrow window of opportunity that has been presented by Congress.  Those feeling like they might not make it to 2010 are trying to hold on.

Why such a ridiculous set of circumstances?  Although it is impossible to guess the will of Congress, it is no secret that many legislators have been opposed to estate taxation for years.  Despite opposition from factions who see elimination of the estate tax as a benefit primarily available to the "rich," most charitable, non­profit organizations are opposed to lifting estate taxes, as well.

All wealthy people have "gifting" strategies to lower their taxable estates.  Without the need to lessen the burden of taxation on estates, directors of non-profits reason, there is little incentive for donors to pony up for good causes.  Most wealthy people make donations because their accountants tell them to, not because they want to make the world a better place. If the estate tax disappears, along with it will go the incentive for a lion's share of the planned giving in this country.

Why 2010, though?  Those in favor of eliminating estate tax assuaged the concerns of the opposition by proposing a gradual, 10-year transition, to measure the effect of less revenue from taxable estates.  This transition culminates in a single year when the tax is zero.  The law also has a built-in "sun­set" provision, that reverses the changes put into effect last summer if Congress does not act to retain the law. Supporters of eliminating estate tax are gambling that the Congress seated in 2010 will not reverse the changes passed in 2001, probably reasoning that no elected official wants to be associated with an increase in any tax.  Only a very small percentage of U.S. taxpayers actually end up paying an estate tax, but with rates that begin at 37 cents on the dollar, a substantial amount of revenue is raised from a small number of taxpayers.  However, if the U.S. is still running a deficit in 2010, the prospect of raising revenue with a tax that affects only a tiny minority will look appealing.

When I commented to a friend of mine in the U.S. Forest Service about the ridiculousness of the 2001 changes, he said, "It is the smoke and mirrors of Congress doing business."  Congress is not known for reversing earlier decisions, especially when those decisions were generally popular.  Creating a situation where people are planning to die by euthanasia to avoid estate taxation is morbid and outrageous. Since the estate tax really only affects relatively few taxpayers (most of whom are also fabulously wealthy), it is not entirely unlikely that the estate tax will be back in some form in 2011.

The one segment of society often hurt by estate taxes are "cash poor, but land rich" families.  Most of these farm and forest owning families do not realize that the fair market value of their land is often high enough that, when coupled with the decedent's other assets, an estate tax is due.

There is also a cruel irony that the due date on estate taxes is equal to the human gestation period: nine months after the decedent passes away, taxes must be settled unless the family requests an extension.  Even a taxable estate (after applying the Unified Gift and Estate Tax credit, described below) of $100,000 leaves the family with a $37,000 tax bill, which is more cash than most families keep on hand.  Many land owning families are forced to sell land to settle an estate tax, usually to the highest bidder who does not have farm or forest practice in mind.  Forcing forest and farm owning families to divide up land to settle an estate is an absurd policy, but regardless of the fate of changes put in place in 2001, most families can easily and cheaply avoid estate taxation, with just a little extra planning. In other words, don't depend on Congress.

The Unified Gift and Estate Tax rules allow a taxpayer to shelter otherwise taxable gifts plus the final estate with a "credit"' that for most taxpayers covers the tax due on the sum of taxable gifts and the taxable estate.  In 2002, for instance, the exemption is $1 million, and this amount increases each year according to the rate of inflation.  In 2009, the exemption jumps to $3.5 million just before the next year when there is no tax.  In 2011-if the current law is not sun­setted the rules revert back to the Taxpayer Relief Act of 1997. If this happens, the exemption drops back to $1 million per taxpayer plus adjustments for inflation.

A husband and wife develop a trust agreement in two parts, one in the name of the wife, and the other in the name of the husband.  The couple then divides their assets, roughly down the middle, and re­title the assets to the two trusts.  This allows the family to take advantage of two exemptions rather than one, effectively sheltering twice the amount they are able to shelter without using a "Unified Credit Trust," as the arrangements are sometimes called (another common name is `A/B trust").

A "trust" is a separation of the legal and beneficial interests in property.  In a Unified Credit Trust, the legal and beneficial interests are separated for tax purposes, but the Trustees are usually also the beneficiaries, until they die.  Another advantage of placing one's assets into trusts is that it avoids the cost of probate.

When one of the spouses passes away, the Unified Gift and Estate Tax credit available that year (in 2002 it is $1,000,000) shelters up to this amount from taxation.  The best part is this: income from the decedent's trust, and the assets themselves, are available to the surviving spouse.  When the surviving spouse passes, the exemption available that year shelters the other half of the trust. Confused?  Here's an example for a couple without a trust, followed by the same example with a Unified Credit or A/B Trust.

A husband and wife purchased 300 acres of forest land in 1953 for $45,000.  In 2002, the land is worth $900,000. Combined with their other assets, the total estate in 2002 is worth $1.4 million.  The husband dies in 2002, leaving the entire estate to his wife who inherits the assets tax-free.  In 2004, when the total estate is worth $1.6 million, the wife passes away leaving the land and other assets to her children. The taxable estate is figured as follows: Total estate value minus the exemption available under the current Unified Gift and Estate tax exemption. In this case, it is $1.6 million minus a $1 million exemption, which results in a taxable estate of $600,000.  The "exemption" is always figured as a "credit," which in this instance leaves a total tax due equal to $210,000.  If the family has cash and other assets it can liquidate to pay the estate tax, there is no need to sell land.  However, more often than not, families sell land to raise money to settle with the IRS and to divide the estate among heirs.  The result: parcelization of forestland and fragmentation of purpose; a tragedy that could have been easily -and cheaply- avoided with a Unified Credit Trust.

Consider the same couple, same land, same values, but in this case they decide to create a "Unified Credit Trust" in 2002, placing half the value of their assets in a trust under the wife's name, and the other half in a trust under the husband's name.  The husband dies in 2002, and approximately half of their total estate is sheltered by the Unified Gift and Estate Tax exemption that is available in 2002 - 1 million.  The wife can use the income from her hus­band's trust, or the assets themselves while she is alive.  Or, the husband's trust can be disbursed to his heirs; the choice is up to the husband and wife at the time they set up the trusts.

When the wife dies in 2004, her trust is sheltered with the $1 million (plus the rate of inflation since 2002) exemption.  If her trust is half of the total estate, it has about $800,000 of assets in it and this amount is fully sheltered by the $1.0-plus exemption in 2004.  The result: no estate taxes are due!  The same family without a Unified Credit Trust pays $210,000 in estate taxes.