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I can’t sleep for some reason, so I figured I’d write a post and then start work early.  Honestly there hasn’t been a lot going on since we got back from the Bahamas.  Both Rach and I have been focused on work.  We did meet with an attorney to draft up wills, which puts us close to finishing the set of items that we wanted to take care of this year for our personal finance.  I still need to set up our money market account for our emergency fund which I’ll likely do this weekend. 

The wills process was interesting.  The part that we probably understood the least was the estate tax.  Apparently this year the federal estate tax has ‘expired’ such that if you were to pass away now, then you could leave your inheritance without that tax applying.  In general the tax is stupidly high; in 2001 for example, the estate tax was 55% of your ‘taxable estate’ – which that year was anything over $657,000.  In recent years it’s been more reasonable, in so much as the exclusion amount (the amount of money you can leave without being taxed) has gone up.  In 2009 the exclusion amount was $3.5 million and the tax was 45%.  Who knows what the estate tax will be like in 150 years when I might have to worry about it, but given the trend it will 1) exist, and 2) have a “low” exclusion amount, and 3) be a stupidly high tax rate.  This isn’t even considering a tax levied estate tax.  For WA the estate tax is decoupled from the federal tax, which ranges from 10-19% depending on your taxable estate.  So if you own property in WA and you want to leave $10 million dollars and you die next year, you would be taxed 55% on $9 million of that, and another 19% on $8 million.  That’s a lot of tax!

The investigation was enlightening.  In general I think it’s perfectly reasonable for the govt. to impose an estate tax.  I think a $1 million threshold is too low however; minimally the threshold should increase over time, and yet it 2011 its scheduled to ‘reset’ to $1 million instead of the $3.5 million that it was in 2009. 

So are there decent ways to minimize the estate tax?  I think so.  First, why die with that much money?  Amassing wealth for the joy of watching your the numbers on your bank statement go up seems silly.  I, personally, believe that if you end up collecting a lot of money, then you should try to spend some of it!  Outside of potentially helping you relax and have fun, it helps the economy when you spend money.  Second, you don’t have to wait until you die to start distributing your wealth to your heirs.  You can hand over a certain amount of money as ‘gifts’ tax-free each year.  Why not do that?  You then get to leave more money and you get to see how your heirs use it!  Third, in general it’s probably better to leave most of your money to the youngest/younger generation.  That way it’s most likely longer before that same money gets to a point where it could be eligible for the estate tax again.  Finally, there are various tax shelters that allow you to leave more money, given certain restrictions, without the estate tax applying.  For example, our lawyer suggested that one such mechanism was to create a trust if either Rach or I died.  We could ‘leave’ that trust up to $1 million (depending on the estate tax threshold at the time) without worrying about the estate tax.  In addition, another $1 million could be left tax-free to whoever is living longer.  The survivor could draw from the trust for various things (though not for everything) – medical expenses, ‘life-style maintenance’, but not things like extravagant vacations.  When the survivor passes away the money in the trust would automatically pass to our heirs without being taxed, and would no longer be limited by any of the trust restrictions.  That’s in addition to the normal amount that could be left to our heirs without being affected by the estate tax. 

I think Rach and I will mostly try to avoid dying with a huge amount of money.  We’re pretty successful at spending money to date, so maybe it won’t be a problem longer term  

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