Congress Finally Acts -- Now What?

What happened?

Congress finally passed and on December 17, 2010 President Obama signed into law the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (I guess that is going to be known to tax lawyers as "TRUIRJC" which I can't say with a straight face". The "2010 Tax Act" (my preferred reference), in addition to the continuation of the 2001 tax cuts, made substantial changes in estate, gift and generation skipping transfer ("GST") tax provisions.

First, the estate and GST taxes were reinstated as of January 1, 2010. The gift tax, which had not been repealed, remains. Executors for someone who died in 2010 can elect out of the estate tax and be subject to the law in effect on January 16. If you don't want to pay estate tax, you are subject to hated 'carry-over basis adjustment'.

Second, and this is the really big news is the virtual elimination of those taxes with the new $5,000,000 exemption ($10,000,000 for married couples). The intent of Congress was to tax only the 'very wealthy' and not just your run of the mill multi-millionaire. The very wealthy only get a tax rate reduction to 35%.

Third, just for the fun of it, the new rules only apply for 2010 through 2012. The pre-2001 estate tax provision with the $1,000,000 exemption and 55% estate tax rate.

What should I do now?

So you are thinking that you don't have anything near $5,000,000 so I can just ignore estate planning. That would be just too simple. My last article discussed the uncertainty caused by the limited life-time of the new rules and how even simple plans will need to be adjusted to meet the needs both today and in 2012.

You need to have your Will or Trust reviewed by a qualified attorney and, more likely than not, she will want to make some serious changes to provide flexibility regardless of what estate tax program will be in effect on your death.

If your plan includes provisions to divide assets based upon a formula clause, it needs to be reconsidered so your intended beneficiary does not bet too little or too much just because the exemption amount fluctuates in the future. Those provisions can result in unintended beneficiaries receiving your hard earned assets. that your loved ones continue to be treated how you wanted under the old law. This is a real problem for any married couple.

If your plan does not provide inheritance protection for your child, you really need to consider adding an Inheritance Protection Trust. That kind of trust will ensure that the inheritance will not end up in the hands of your child's spouse in the event of death. The inheritance can also be protected against the risk of catastrophic injuries.

All of the non-tax reasons why you need a Will or Trust are not affected by the new tax law. If you don't think you have to worry about taxes just now, you need to have a solid estate plan in place to protect your loved ones in the event of an untimely death.

Lots to think about. I know that you probably don't want to think of any of this during the holidays, but I suggest you put a review on your to-do list for January.

Happy holidays and I'll see you next year.

The Tax "Deal" - the Forecast is Dark Clouds on the Horizon

There has been a lot of talk this week about the "deal" to extend the Bush tax cuts. That "deal" also includes a substantial increase in the amount that can pass to your heirs without paying any federal estate tax. The 'exemption amount' will be increased to $5,000,000 per person.

The stated reason for that increased exemption amount is to help 'small' business owners and family farmers pass the business or farm to their heirs without having to pay estate taxes. It also means that all but a very limited number of multi-millionaires will have to file and pay federal estate tax.

Dark Clouds are Forecast.

There really are dark clouds on the horizon even if the "deal" is passed by Congress before the end of the month. The increase in the exemption is going to add billions of dollars to the federal deficit. The Treasury is going to have to borrow that money and we are all going to have to pay taxes or have benefits reduced just to pay the interest on those loans. And the day will come when the loan will have to be paid in full.

There is a more pressing problem, however, for estate planning. The "deal" only lasts two years! At the end of 2012 we will find ourselves right back where we are now -- facing a stupendous increase in the number of estate tax returns and tax payments when the exemption amount falls to just $1,000,000 starting January 1, 2013. The problems from the end of the Bush tax cuts (and the increased exemption amount from the "deal") return in 2o13. The uncertainty of how all of the estate and gift taxes will be interpreted once the large exemption disappears is the big grey cloud on the horizon for estate planners.

Estate planning attorneys have been hoping for some stability in estate tax policy so plans can be designed based on a clear expectation of how estate taxes will be calculated when death occurs. That stability disappeared with the Bush tax cuts. Estate planning attorneys all knew we were faced with the potential return to the 'old rules' with only a $1,000,000 exemption in 2011 and had to plan for the return of the middle class taxable estate. The same lack of stability continues since we can only look at what happens at the end of the next two years.

What does all this mean to you?

Don't think that the "deal" will make your estate planning easier just because you don't have Five or Ten Million Dollars. The vast majority of our clients require extra tax planning if the exemption returns to 1 Million Dollars.

Your estate planning lawyer must assume that the lower exemption will return and is forced to include options to address the substantial estate tax liability that will return in 2013. Your estate plan will continue to require more complication just to protect your family and your business with the automatic termination of the "deal" in 2013.

Where's the silver lining?

Just remember, if there is a silver lining in every grey cloud, that doesn't mean that the grey cloud is gone. Don't let the proposed silver lining blind you to the limits inherent in any "deal" that lasts only two years!

Update

I thought I was the only one to think about clouds and silver linings. Imagine my surprise when I just found a similarly named (and more articulate) article in Wealth Strategies Journal by my good friend, and WealthCounsel principal, Lew Dymond. It is a little technical but it is very interesting.

Richard

The Federal Estate Tax Lapsed for 2010

The federal estate tax lapsed for 2010, and barring no action by Congress it was scheduled to return on Jan. 1 with an exemption of $1 million per person and a maximum rate of 55 percent. 

I have good news to share with you.  The long wait for action to address the unknown status of the federal estate tax may be approaching an end.  In a December 6, 2010 online posting by the New York Times, they reported that President Obama announced a tentative deal with Congressional Republicans on Monday.

An excerpt of the article appears below, and a link to the full article is included.  The accompanying photo by Joshua Roberts of Reuters appeared with the article.

Mr. Obama made substantial concessions to Republicans. In addition to dropping his opposition to any extension of the current income tax rates on income above $250,000 for couples and $200,000 for individuals, he agreed to a deal on the federal estate tax that infuriated many Democrats. The deal would ultimately set an exemption of $5 million per person and a maximum rate of 35 percent — a higher exemption and far lower rate than many Democrats wanted.

http://www.nytimes.com/2010/12/07/us/politics/07cong.html?pagewanted=1&_r=1&nl=todaysheadlines&emc=a2

 

But the NY Times article also cautioned that the deal is not supported by all parties.  So resolution may be within sight, but it is not yet a finalized deal. 

“The House Democrats have not signed off on any deal,” Representative Chris Van Hollen of Maryland, who has been representing House Democrats in formal negotiations on the tax issue, said Monday night. “We will thoroughly review and discuss the proposed package in the caucus.”

Some senior Democrats said an agreement by Mr. Obama to accede to Republican demands on the estate tax could lead to a revolt among lawmakers.

With this positive news in the air, it may be time to schedule a meeting to adjust your estate plans to maximize the impact of this likely change in the federal estate tax law.  Call me for an appointment, or leave a comment with a question below.