How Do I Avoid The Estate Tax?

It’s an unfortunate fact, but when wealth changes hands in America, it’s inevitable that Uncle Sam will want his share.

In a survey from The Hartford Financial Services Group, Inc., affluent Americans, especially those with more than $2 million in net worth, say they are most concerned about their families having to surrender significant chunks of an estate to federal taxes.

Despite those concerns, however, nearly 40 percent say they have not taken any steps to plan their estates and one in three surveyed say they don’t know where to start.

In 2007, researchers for The Hartford gathered information about views on the estate tax from 750 adults with annual household incomes of $150,000 or more. Of the sample, 70 percent had more than $1 million and 36 percent had more than $2 million in net worth. The Internet survey was conducted by Opinauri and had a margin of error of plus or minus 3.5 percent.

Concern over the estate tax is rising. Just under half of those surveyed said they were more concerned about the estate tax than a year ago. Te research showed that those concerns rose in proportion to the respondents’ savings. Compared to the sample average of 49 percent who expressed greater concern about the estate tax, 73 percent of Americans with $5 million or more in assets, and 56 percent of those with more than $2 million in assets confessed that their fears were rising, the survey found.

The top causes of gray hair over the estate tax were the respondents’ increase in their net worth (65 percent), the growing federal budget deficit that might imperil any estate tax cuts (47 percent), and their sense that the new Congress is less likely to repeal or reform the tax (41 percent). Respondents were allowed to offer multiple answers to surveyor’s questions about estate tax concerns.

“The growing anxiety over the estate tax is well founded as many more people will be subject to the tax – and have to pay more taxes – in 2011,” said Patrick Smith, vice president and director of The Hartford’s estate and business planning department.

“Current law calls for the estate tax to be repealed in 2010 and then reinstated in 2011. Federal estate tax rates are scheduled to go up and personal exemptions are scheduled to go down, which means individuals who plan to pass more than $1 million in assets to their loved ones will have to take the estate tax into account. An additional concern is the growing impact of state estate taxes separate and distinct from the federal system.”

While a majority of those surveyed (54 percent) indicated they had taken steps to plan their estate, a correspondingly large number (37 percent) said they had not. What were the reasons for putting off one of life’s ultimate responsibilities? The survey found that 34.3 percent were unsure about where to start and approximately half hadn’t yet found the time to put their estate in order (though they indicated they intended to, at some point).

Of those surveyed who had begun to plan their estate, the tools they have used seem to suggest an affinity for the more straightforward steps, with fewer opting for a variety of powerful, but more complex, tools that are readily available:

  • 81 percent had written a will
  • 68 percent had talked to family members about their intentions
  • 63 percent had created a Power of Attorney or Living Will
  • 51 percent had created a Living Trust
  • 40 percent had purchased life insurance for estate liquidity or to pay estate taxes
  • 22 percent had created an Irrevocable Life Insurance Trust.

With a variety of estate planning strategies available and the relative intricacy of the process, the role of financial professionals in helping to layout a plan is critical. Of the more than half of respondents who had begun estate planning, 74 percent worked with an attorney, 47 percent worked with an accountant and 28 percent worked with an insurance agent. Smith said consulting a professional is a good start.

“The Hartford encourages everyone to plan their estate by working with their legal and financial professionals,” he said. “If you think your family might be subject to the estate tax, take advantage of all available tax credits and exclusions, gifting techniques and other planning options. A good estate planner will help you make the most of these techniques and others.”

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