By: Stephen C. Hartnett, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys
Most of us want to live as long as possible. But, from a tax perspective, 2010 may be a very good year to die! But, we don't know for sure… You're thinking: "Huh?!"
Current Tax Law Situation
Back in George W. Bush's first months in office, Congress passed "the Economic Growth and Tax Relief Reconciliation Act of 2001," or "EGTRRA." Among other things, that law made significant changes to the estate tax system. It gradually increased the amount that Americans could pass exempt from federal estate tax, the "applicable exclusion," from $1 million in 2002, $2 million in 2008, and $3.5 million in 2009. EGTRRA provides that in 2010 the estate tax is repealed and there is no estate tax. That's right, no estate tax. However, due to budgetary constraints, they had the law "sunset" or go away at the end of 2010. Thus, in 2011 and thereafter the estate tax returns with a $1 million applicable exclusion. Thus, from a tax perspective, 2010 may be a good year to die!
However, many expect Congress to act to prevent the repeal of the estate tax. In fact, on Dec. 3, the House voted to make permanent both the estate tax and 2009's $3.5 million exclusion. However, the close House vote indicates that passage is not assured in the Senate, which requires 60% approval to avoid a filibuster.
There are several other measures currently before Congress which would prevent the repeal of the estate tax. These bills would set the exclusion amount permanently at between $2 million and $5 million per person. Others expect that Congress will not be able to agree on a permanent solution but simply will do a one-year extension of the current $3.5 million exclusion to prevent the repeal in 2010. If Congress does a one-year extension, then the exclusion will drop to $1 million in 2011, unless Congress acts again before then.
We'll know by year-end, right?
Not much is certain. Even if Congress fails to act before the end of 2009, it can still change the law and have the change apply retroactively to Jan. 1st (at least if it acts within 9 months). As a result, we may not know if there is an estate tax until even well into 2010!
So, how do we plan in the midst of this uncertainty?
- First, do an estate plan. It has often been said that if you fail to plan, you might just as well plan to fail. Remember to keep your plan updated. If there are changes in the law or in your circumstances, be sure to let your estate planning attorney know.
- Second, it's not just about the taxes! Estate taxes currently affect less than one percent of people. The most important reasons to plan are captured in the photos displayed around your home: your family.
- Third, don't procrastinate. Estate tax uncertainty is not a good excuse for procrastinating. Without a current estate plan, you are jeopardizing the futures of those most important to you. Do you really want confusion and turmoil to be your legacy? How would your assets be managed? Who would care for minor children?
- Fourth, a Trust-based estate plan is a way to protect your privacy, during your life as well as when you're gone.
- Fifth, a good estate plan not only protects those around you after your death, it protects you and your family in the event of your incapacity.
In the meantime, as you plan for the "certainty of death and taxes," remember that there is always uncertainty in life. Most of us don't know when we'll pass away or can control it. The only things we can control are the choices we make during our life. Estate planning is constantly changing based on new laws, and plans are always changing based on life and family circumstances. Plan before it's too late.
The American Academy of Estate Planning Attorneys will be releasing new information on estate tax planning as soon as more information is available.
About the American Academy of Estate Planning Attorneys
The Academy is a national organization dedicated to promoting excellence in estate planning by providing its exclusive membership of attorneys with up-to-date research on estate and tax planning, educational materials, and other important resources to empower them to provide superior estate planning services to their clients. The Academy expects members to have at least 36 hours of legal education each year specifically in estate, tax, probate and/or elder law subjects. For over 16 years, the Academy has been a highly-regarded and sought-after resource for attorneys and consumers alike, and has been recognized by Consumer Reports, Suze Orman in her book, 9 Steps to Financial Freedom and numerous times by Money Magazine.
