After flirting with death, the estate tax now looks like it isn't going away anytime soon -- and that's creating headaches for wealthy families and their advisers.

Instead of having an estate plan that's set in stone, many people have been flocking to flexible strategies that can help minimize taxes but can still be adjusted as tax laws and circumstances change.

Right now, the estate tax system is in a state of flux, thanks to tax laws passed in 2001. In recent years, advisers say that some clients were essentially frozen and unwilling to enter into expensive estate tax savings plans because they were hoping that the tax would soon disappear or be substantially reduced. They didn't want to enter into a complex tax-saving trust or other strategy, or be subject to hefty gift taxes, if the estate tax were to go away.

Currently, the amount that can be exempted from federal estate taxes is $2 million per person, but that number rises to $3.5 million in 2009. (Spouses can typically leave an unlimited amount to each other.) Then the tax is slated to disappear altogether in 2010, but it comes back with a vengeance the following year when the exemption reverts to just $1 million. The top federal estate tax rate on the largest estates is 45 percent until 2009. It will rise to 55 percent in 2011.

Many people are affected when the exemption amount changes. According to new data from the IRS, the number of estate tax returns has dropped by more than 58 percent from 2001 to 2005, from about 108,000 to only 45,000 -- and only 45 percent of those 45,000 returns were taxable.

If you would like to discuss this issue, please contact your Rea advisor today.

- from The Wall Street Journal

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