New Estate Tax Exemption

The new tax package stipulates that the estate tax exemption amount for each individual will be $5,000,000 – a new all-time high. The estate tax exemption was $50,000 in 1916 and rose slowly to $675,000 in 2000-2001. Interestingly, the value of $50,000 in 2000 dollars (3% inflation added) is $598,820 so in reality the exemption amount hadn’t grown that much. It was $3,500,000 in 2009 and zero in 2010.

Most of us are well under the $5,000,000 threshold, but for others, this means that a couple can pass $10,000,000 to their beneficiaries estate tax free. Of course, they will need a trust to shelter the first $5,000,000. A single person can pass the $5,000,000 and all values over that are taxed at a modest 35%. While 35% may not seem modest, the tax has been as high as 55% in previous years.

The exemption amount was scheduled to go back to $1,000,000 in 2011 unless Congress agreed on a different amount. While $1,000,000 is a lot of money, it isn’t what it used to be. According to Money Magazine, there were 7.8 million individuals classified as millionaires in the US at the end of 2009. The ultra-high net worth individual, which is categorized as $5 million or more, was only 980,000, which is a pretty exclusive group.

At the end of 2009, the average US resident’s net worth – the market value of property and investments minus mortgage, credit card and other debts – was $175,600 according to data from the Fed and the Commerce Department That is a long way from $5,000,000 or even $1,000,000! How do you get there from here? Live within your means and save between 15% and 20% of your income. When you live within your means you do not use a credit card to buy things that you cannot afford. It sounds pretty simple but I know it is hard to do. The media blitz of things that we must have, that we can’t live without, that seem to be an absolute necessity, are just never ending. It is hard to be frugal in the current climate. However, if you are not frugal in the years you are earning an income, I can guarantee that you will be frugal in your retirement years because you will not have enough assets to last your lifetime.

Barbara Gray, CFP®

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