In the realm of estate planning 2010 was a uniquely good year, because for the first time since it was enacted in 1916 there was no estate tax. This levy was repealed for one year due to a provision included in the Economic Growth and Tax Relief Reconciliation Act that was passed back in 2001. Tax relief is always welcome, and in fact there is solid logic behind a permanent repeal of the tax. After all, your income is taxed throughout your life and then what you have left at the end of your life is taxed heavily once again when you pass it on to your heirs.

As 2011 draws nearer you may want to take a close look at your estate plan. Prior to the temporary repeal the estate tax the exclusion stood at $3.5 million. If your estate was worth less than this amount it was not subject to the estate tax; if it was worth more, only the portion that exceeded $3.5 million was taxable.

We are standing on a new playing field in 2011, however. The estate tax exemption amount is going all the way down to $1 million. So, many estates that were under the exclusion amount in 2009 are going to be above that amount in 2011 and vulnerable to the draconian estate tax that is scheduled to top out at an eye-popping 55%.

This issue is very contentious, and there has been talk on Capitol Hill about possible legislative action to alter these parameters. But as it stands now a portion of your estate will be subject to the estate tax if its overall value exceeds $1 million. Our suggestion is stay aware of the matter as the debate continues, inventory your assets and be prepared to make some changes if this new dynamic places your estate in a vulnerable tax position.

If you do find yourself with a taxable estate, one solution you will want to consider is an irrevocable life insurance trust, or ILIT. Because most professionals believe that the permanent estate tax exemption is likely to be closer to $3.5 million rather than $1 million, you may want to consider funding an ILIT with term life insurance coverage. This will guarantee your insurability in the event that the lower $1 million remains permanent, and ensure that you do not overpay for coverage you do not need long-term, should the exemption be expanded in future years as many expect.

Tags: Advance Planning, Estate Planning, estate tax, Inheritance Planning