“A son can bear with composure the death of his father, but the loss of his inheritance might drive him to despair.” – Niccolo Machiavelli

With Bush in office, is it only a matter of time before the highly unfair estate tax (which taxes you, at your death, on what is left of the money the government has already taxed you on once before) is gone?

It’s been on the chopping block not only of Republicans but also of many of Democrats (not to mention Libertarians). And with the Baby Boomers feeling the effects of it as their parents’ estates are routinely chopped in half by the IRS, you’d think it would be a sure thing.

I wouldn’t count on it.

Many people don’t realize it, but Congress already promised to lower the top estate-tax rate but never did. The due date for the reduction has been pushed forward indefinitely. So even if a new law is passed, there is no assurance it will ever be put into effect. Or that if effected, it won’t be repealed with the next administration.

If you are lucky enough to own a business valued in the millions — and have children you’d like to leave it to — it pays to consider some form of estate planning. Estate planning usually boils down to this: You buy an insurance product (part insurance, part investment) the value of which one day will hopefully equal the amount of taxes your kids will have to pay on your business the day they inherit it. If they don’t have cash to pay those taxes, they may be forced to sell the business at a fire sale to raise the money quickly. (The IRS is not a patient creditor.)

Generally, what you do is put the insurance policy in the name of an irrevocable trust for your kids. You control it while you’re alive, but they get the money when you go. The face amount of the insurance (the amount the trust gets when you die) should be enough to pay the estate taxes on the value of the business, but not much more. You don’t want to pay extra premiums for a policy when its only purpose is to cover taxes. The investment portion of the policy grows over time. Eventually, it may be big enough so that its dividends are high enough to pay the insurance premiums. (That’s what you hope for.)

I don’t like insurance. But until you are really rich . . . until you have enough liquid assets to cover IRS bills and the like . . . insurance makes sense. At least, consider it.

FYI: Right now, the top federal estate-tax rate is 55%. Through the end of 2001, the lifetime exclusion amount (the amount of value you can have in your estate that would not be taxed) is $675,000. That is scheduled to gradually rise to $1 million by 2006. And there’s a yearly gift tax exclusion of $10,000 per parent per child. That means a man and wife can give each of their children $20,000 a year tax-free. And there is usually no tax on bequests or gifts between spouses.

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.