Learning How To Avoid Estate Tax

It’s an unfortunate fact, but when money changes hands in America, Uncle Sam is bound to want a piece of the action.

According to a survey conducted by The Hartford Financial Services Group, Inc., affluent Americans, particularly those with a net worth of more than $2 million, are more concerned than they were a year ago about their families having to surrender significant portions of an estate to federal taxes.

Despite these concerns, nearly 40% of those polled have not taken any steps to plan their estates, and one-third are unsure where to begin.

In 2007, The Hartford researchers gathered opinions on the estate tax from 750 adults with annual household incomes of $150,000 or more. 70% of the sample had a net worth of more than $1 million, and 36% had a net worth of more than $2 million. Opinauri conducted the Internet survey, which had a margin of error of 3.5 percent.

Concerns about the estate tax are growing, possibly as a result of the 14-month wait for national elections. Just under half of those polled were more concerned about the estate tax than they were a year ago. According to the study, respondents’ concerns increased in direct proportion to their savings. In comparison to the sample average of 49 percent who expressed greater concern about the estate tax, the survey found that 73 percent of Americans with $5 million or more in assets, and 56 percent of those with more than $2 million in assets, admitted that their fears were growing.

The respondents’ increased net worth (65%), the growing federal budget deficit (47%) that could jeopardize any estate tax cuts, and their belief that the new Congress is less likely to repeal or reform the tax were the leading causes of gray hair over the estate tax (41 percent). Respondents were permitted to provide multiple responses to surveyor 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“Current law calls for the estate tax to be repealed in 2010 and then reinstated in 2011.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 the majority of those polled (54%) said they had taken steps to plan their estate, a sizable proportion (37%) said they had not. What were the reasons for putting off one of life’s most important tasks? According to the survey, 34.3 percent were unsure where to begin, and roughly half had not yet found the time to put their estate in order (though they indicated they intended to, at some point).

The tools used by those surveyed who had begun to plan their estate appear to indicate an affinity for the more straightforward steps, with fewer opting for a variety of powerful, but more complex, tools that are readily available:

  • 81% had drafted a will.
  • 68% had discussed their plans with family members.
  • 63% had drafted a Power of Attorney or Living Will.
  • 51% had established a Living Trust.
  • 40% had purchased life insurance to increase estate liquidity or to pay estate taxes.
  • 22% had established an Irrevocable Life Insurance Trust.

With a wide range of estate planning strategies available and the relative complexity of the process, the role of financial professionals in assisting in the creation of a plan is critical. More than half of those who had started estate planning worked with an attorney, 47 percent with an accountant, and 28 percent with an insurance agent. According to Smith, consulting a professional is a good place to 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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