Estate laws may require replanning

You've worked hard for your family. You'd like to leave an estate that would support them comfortably, so several years ago you sat down with your lawyer and designed a will to take best advantage of federal tax laws.

But President Reagan's massive tax bill has changed the rules. Should you call up that attorney, and set an appointment to go over your affairs?

Yes, if you have at least a moderate amount of cash and property. The new laws have virtually eliminated the federal estate tax. But you must act in advance to take full advantage of the legislation -- and planning for the transfer of property between family members has taken on new importance.

"This is going to require revision of wills for everyone subject to estate tax," says Don Weise, tax partner at accounting firm Touche Ross.

Four major changes must be taken into account:

* Only the very largest estates will be taxed at all. Under current law, estates worth $175,625 and up are subject to government levy. The new law increases the ceiling to $225,000 after Dec. 31, 1981. The figure will keep rising until 1987, when it reaches $600,000.

With proper planning, this means hardly anyone will pay federal estate taxes. Even without the higher ceiling, 97.2 percent of estates won't have to pay such taxes this year, estimates the Joint Committee on Taxation. If the $600,000 limit were in effect right now, 99.7 percent of estates would be inherited tax-free.

* The top tax bracket has been reduced from 70 to 50 percent, phased in over a four-year period.

* Your spouse can inherit everything, tax-free. Generally, under current law , only one-half is deductible.

"This is probably the most radical change," says David Rhine, tax manager for accounting firm Seidman and Seidman.

* You can give away more expensive gifts without being taxed. The annual gift tax exclusion has been increased from $3,000 to $10,000. In addition, gifts covering education or medical costs are now tax-free.

What should I do to take advantage of these changes?

Many small businessmen and individuals with large estates carry insurance to pay estate taxes. The need for these policies should now be reexamined, say experts. Likewise, you may no longer have to save a pool of cash specifically to pay off the taxes.

And those whose estates hover near the tax borderline should pay careful attention to tax planning. A slip-up could be costly to their heirs, as the estate tax tables start steeply, at 37 percent.

So in 1987 "you would jump from no tax at $600,000, to 37 percent tax at $600 ,001," says David Rhine.

Accountants also suggest you give regular gifts to your heirs. The increased gift tax exclusion means a husband and wife can give $20,000 to each of their children, every year. Give appreciating property and, in effect, you pass along even more.

But the change requiring the most scrutiny is the new, unlimited marital deduction. It seems too easy: Leave everything to your spouse, and you pay no taxes.

If you do that, you'll have fallen into a trap, say experts. Your children may end up paying taxes they could have avoided, and you will give up some control over where your money goes.

Consider this: Both you and your spouse are entitled to a $600,000 deduction. If you leave an estate of $400,000, tax free, and your spouse has $300,000, the estate your children eventually inherit will be $700,000 -- and they'll have to pay tax. If you had left part of your money to the kids in the first place, they could have avoided taxes altogether.

And what if your spouse remarries, and draws up a will leaving nothing to your kids? Or leaves money to a charity you detested? How do you provide for a spouse, yet keep control over how money passes into the next generation?

All this can be solved, say accountants, by a minor provision in the new bill. It provides for a type of trust that produces "terminable interest."

"I find this one of the more exciting parts" of the tax bill, says Charles Bogen, partner in accounting firm Ernst & Whinney.

With this provision, a husband (for example) can set up a trust whose income goes to his wife. Under the new law, the wife can receive income from the trust tax-free, through the marital deduction. But at her death, the trust's principal goes to the children, or whomever the husband names as beneficiary.

Thus the husband takes care of his wife, using the marital deduction. And he also provides for the orderly distribution of his assets onward to the next generation.

What estate tax changes affect small businessmen and farmers?

Two other provisions in the bill make it easier for farmers and small businessmen to keep their property in the family.

* Their real estate can be valued at a reduced amount, based on its current business use, not fair market value.The reduction can't exceed $500,000.

* If a farm or small business accounts for more than 35 percent of the value of an estate, estate tax payments can be deferred over five years. This is important because "it preserves capital at a time the business needs it the most ," says Charles Bogen.

Next: the tax cut and the small businessman.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.