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October 20, 2009 5 big myths about the estate tax
Efforts continue to repeal the estate tax
permanently. But supporters and opponents tend to bypass the facts. Its time to cut through the bull.
Worried about how the Estate Tax may affect your inheritance? This article explains which estates need to pay the tax and if an inherited house will be subject to inheritance or estate tax.
By Liz Pulliam Weston on MSN Money
Reasonable people can disagree about whether the United States should have an estate tax. There are good arguments both for and against.
arguments, though, require good information. Bad information distorts
the debate, and there's far too much floating around about the
estate-tax system. Here are some of the most persistent and misleading
Myth No. 1: Lots of people face the federal estate tax
the 2.4 million people who died in 2001, exactly 51,841 estates (2% of
the total) faced a federal estate tax, according to recent IRS figures.
more than twice that number of estates, 108,112, had to file estate-tax
returns, which were required that year for gross estates worth more
than $675,000. (That estate-tax exemption limit has since been raised
in steps; it was $1.5 million for 2004 and 2005, and rises to $2
million for 2006, 2007 and 2008.) But 56,271 of those who filed returns
didn't owe any federal estate tax, typically because they left
everything to surviving spouses (see below) or because their debts,
death-related costs and gifts to charity lowered their gross estate below the limit where taxes are required.
The bottom line: The estate tax is indeed a problem for those who have to face it, but its direct impact is far from widespread.
Myth No. 2: Federal repeal has ended death taxes
estate tax is scheduled to phase out, then disappear for one year --
2010 -- and then spring back to life, phoenix-like, in 2011. That's
because Congress was trying to limit the cost of the repeal when the
legislation was enacted in 2001.
President Bush wants to make the repeal permanent, and the House has agreed. But the idea faces tough opposition.
Even if Congress succeeds in doing away with the federal estate tax, other death taxes will almost certainly survive. Some states currently impose their own
levies on estates or inheritors. Many states that didn't charge estates
before the 2001 act have since enacted death taxes to try to make up
for lost revenue. (See "The 'death tax' is far from dead.")
there's probate, the court process that typically follows death.
Probate is different from estate taxes, but it imposes costs just the
same and usually on much smaller estates, sometimes as small as $20,000.
The bottom line: Those who oppose death taxes shouldn't think the battle is over, either now or if the repeal is made permanent.
Myth No. 3: The tax can be avoided
Estate planning can reduce the tax bite. If you're rich enough, however, your estate will eventually face taxes unless:
You die in 2010, the one year in which the estate tax is scheduled to be totally repealed, or
You give everything to charity, or
You give everything to your spouse
spouses get what's known as the "unlimited marital deduction," which
means that anything left to them escapes the federal estate tax. That's
a good deal, of course, but presents problems if you want to make sure
that your money eventually gets to your children or grandchildren. Your
spouse could blow the money or run off with a personal trainer, which
means the trainer's kids, rather than yours, could wind up with your
estate. Even if your spouse is a good steward, a large enough estate
will face the tax when he or she eventually dies.
If the estate
tax could be entirely avoided, then you would figure the richest of the
rich would find ways to do it. In fact, the 469 largest taxable estates
in 2001 -- those worth $20 million and up -- faced a net average tax of
$10.4 million each.
The bottom line: The estate tax isn't one of those levies that only the stupid pay.
Myth No. 4: The tax costs more to collect than it generates
Not even close. But there are some who argue that the total cost of complying with the law may exceed the tax generated.
The IRS assessed $23.5 billion in net estate taxes in 2001, which compares with a total IRS budget of $8.7 billion.
the estate-tax system's costs go well beyond the amount the IRS
collects. People spend money on estate-planning services to reduce the
tax's impact, for example, and on life-insurance policies to help their
heirs pay any tax that's owed. Just filing an estate tax return can be
expensive, since the form can be complicated and a high number of
returns get audited, requiring professional help.
Munnell, a former Federal Reserve economist who served on President
Clinton's Council of Economic Advisors, estimated that the federal
estate-tax system generates $1 in compliance costs for every $1 in tax
revenue that's raised.
The bottom line: It's
pretty clear that collecting the estate tax is cost-effective for the
government. Whether it's cost-effective for the rest of society is
what's up for debate.
Myth No. 5: Repeal will actually increase the burden on heirs
heirs of the biggest estates could face much higher capital-gains tax,
but this isn't an issue that will affect most people. The reasons for
this are complicated, so hang on while I explain.
estate-tax system comes with a great bonus known as the "step up" in
tax basis. Essentially, the property and most investments in an estate
get a new value for tax purposes when someone dies. It's this value
that the heirs use to determine their taxable profit when the property
or investments are sold.
Here's how it works. Say your parents
paid $20,000 for stocks that were worth $200,000 on the day they died
and bequeathed them to you. Without the step up, you'd have to pay
capital-gains taxes on that $180,000 increase in value if you sold the
investments. Thanks to the step-up, however, the stocks get a new basis
of $200,000. If you sold them for $200,000, you wouldn't owe any
capital gains tax.
Estates get this special tax bonus whether or
not they pay any estate tax. For the vast majority of people that means
the increase in value of their estates never gets taxed, either when
they die or when the property they bequeath to others is ultimately
Now that you understand how the step-up works, you can see
why people become upset when they hear that the step-up system is
scheduled to be eliminated along with the estate tax.
Fortunately, there's a big exception.
estate tax repeal law preserves the step-up for up to $1.3 million of
assets you bequeath, plus an additional $3 million of assets given to a
spouse. That means that up to $4.3 million of your estate will retain
the step-up in basis. That should prevent the vast majority of heirs
from having to worry about the issue.
Heirs of truly large estates, of course, would have to contend with
losing the step-up, and the additional paperwork involved likely will
be a nightmare. Without the step-up, they'll have to figure out what
was paid for an asset years if not decades earlier, and try to keep
track of any increases in basis along the way. (Reinvested dividends
increase a tax basis, as do improvements to a house.)
government actually tried this "carryover basis" system in the 1970s
and eventually abandoned it as unworkable. Estate-tax attorneys predict
the same thing may happen again.
The bottom line:
Losing the step-up isn't an issue for the vast majority of heirs, but
it could create problems for those who inherit from the largest
estates. On the other hand, they will have the assets to pay people to
sort out the problems.
October 6, 2009 Vacant homes can be tough to insure
Vacant homes can be tough to insure
Last updated April 4, 2009
If you're planning an extended vacation or a
business trip, or if you have an inherited house, you may have a problem with your home insurance. Because vacant
homes can be targets for vandals, thieves and the homeless, insurance
companies don't want to insure them.
usually try to avoid insuring a vacant home, unless they know someone
is frequently checking on it. Without that, the risk for
claims-inducing damage soars. Besides an increased risk for vandalism
and fire, vacant homes have the potential for flooding from burst pipes
or being infested by insects or other vermin - which can cause
Often, home insurance companies will give you a
window in which a house can be vacant, such as 60 days (some insurers
may allow only 30). After that, they may reserve the right to cancel
your home insurance policy. Home insurers will often work with you if
you have a special situation - for example, if you bought a new house
and are waiting to sell your vacant house, but are still checking in on
A house that is regularly "checked on" shouldn't look
vacant, even though it is. Someone should pick up the mail, mow the
lawn, turn on lights and maybe even park a car in the driveway -
anything that makes it an unattractive target for vandals and vagrants.
Additionally, the person checking on the inherited house should look inside
Another option is to have a
"house sitter" in the home, keeping an eye on things. If a family
member or friend can stay in the home for a period of time, the home is
considered occupied. If family or friends are not available,
house-sitting services are available in most areas, with rates subject
to negotiation in many cases.
What to do when no one wants you
You may not be able to buy a regular home insurance
policy for a vacant house, even if you call every agent in town. In
those cases, you'll have to search for an insurance company that
specializes in insuring vacant homes. Since special insurance policies
for vacant homes are expensive, it may be cheaper to hire a house
sitter. If your agent can't help you, try your state's insurance
department. As a last resort, you can try your state's FAIR plan, which provides coverage to customers rejected by other insurers.
New York, for example, the New York Property Insurance Underwriting
Association (NYPIUA), a type of FAIR plan, takes on vacant homes - with
some conditions and usually with high premium charges. NYPIUA is an
association of private insurers that take on riskier properties.
In the end, the best advice is this: If you must leave a house unoccupied, do your best to limit its time alone.