Planners are groping for answers on estate taxes.

Trying to get a read on the direction of estate planning in this country these days is a bit like watching a football game. The game is in motion, plays are being made, and there certainly will be a final whistle. But no one knows what the final score will be.

Wealth manager and estate attorney Bill Knox likes to point out that if you're in the estate planning business, you'd better be good at dealing with uncertainty. That, after all, is what the profession is all about.

But even Knox is taken aback by all the confusion and unsettled issues overshadowing the estate planning trade these days.

"Believe me, it's a mess," says Knox, of RegentAtlantic Capital LLC of Chatham, N.J. "There has never been this level of uncertainty in the death tax systems that people will have to deal with."

The uncertainty starts with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This law, as estate planners should be intimately familiar with by now, ramps up the standard death tax exemption on an annual basis, to $3.5 million in 2009. The law then provides for the repeal of estate taxes in 2010, followed in 2011 by the return of estate taxes and the exemption being set at $1 million.

That is the scenario, but of course, just about no one believes it will play out that way. There's still an intense lobbying campaign afoot to win a permanent repeal, as well as a diametric push to repeal all of the 2001 tax cuts. As the lobbyists and legislators toss around this political hot potato, the prevailing view in estate planning circles seems to be that death taxes will not be repealed outright, but the exemption will be set at around $2 million to $3.5 million.

That, of course, is only a guess. What isn't conjecture, however, is the flurry of activity on the state level-all of which is also impacting estate planners and their clients.

Under the phase-out of the federal estate tax, state governments are watching their share of death tax revenues peter out to nothing in 2005. That's because most states made their own estate taxes equal to the state death tax credit that estates can take on their federal tax returns. The result has been that states basically get death taxes that would otherwise go to the federal government. The credit can be as high as 16% on estates with a taxable worth of $10.04 million or more. But under EGTRRA, the credit was reduced by 25% in 2002, will be reduced by 50% this year and 75% in 2004, and will be eliminated in 2005, when a deduction will be allowed for state estate taxes paid.

In an effort to recapture revenues they would otherwise lose under EGTRRA, nearly 20 states already have responded by "decoupling" their estate tax from federal law. These states are setting up their own formulas, typically one that ties the state death tax to what the state death tax credit would have been at some point in time previous to the adoption of EGTRRA in 2001. In some states, such as Florida and Alabama, constitutional amendments would be needed to adopt death taxes independent of the federal government.

Knox notes that estate planners will need to be diligent in keeping up with developments on the state level, as well as with the federal law. The decoupling of estate laws, he notes, could lead to some complications. In New Jersey, for example, a decision to fully fund a bypass trust with the maximum $1 million federal deduction isn't as straightforward as it used to be. That's because under New Jersey's $675,000 exemption, the estate would have to pay state death taxes on $325,000. An alternative would be to leave that $325,000 to the surviving spouse instead of the trust, and hope that the federal exemption will be high enough in the future to allow the estate to escape any taxes, Knox notes.

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