At the time of writing this Article, the status of estate tax is in chaos. Questions abound: Will the combined estate and gift tax exemption be $1 million, $3.5 million, or $5 million? Will the top estate tax rate be 35%, 45%, or 55%? Will these changes be “permanent” or will they sunset again in two years? Estate planning attorneys across the nation have differing opinions about what might happen. The nightly news reports deals between the White House and Republicans, and disagreements among Republicans and Democrats. The terms of the Senate Bill make it unlikely to pass, and the House refused to consider the White House deal, threatening to leave us with a $1 million exemption and a top tax rate of 55%. In the midst of chaos, it is difficult to know what to do.
How Are You Affected?
Regardless of what Congress decides, you need to ensure that your property will be divided according to your desires, not dictated by Congress or state law. For years, written mathematical formulas have been used to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Likewise, formulas have been used to provide funds for charitable causes and to benefit family and friends. With the estate tax exemption at $1 million or at $5 million, they may not work as you intend.
Second, if we see a lower estate tax exemption, more Americans will have estate tax liability. This includes middle class taxpayers who previously would not have had to pay estate tax, but easily have $1 million in assets – and often are surprised when they realize that they have that much!
Third, as almost twelve estate tax law changes since 1976 show us, we will never have a “permanent” federal estate tax law. Statistically speaking, most estate plans truly test the estate tax law either at the death of the second to die in a married couple, or at the death of a unmarried person, which is hopefully years into the future. Thus, estate tax laws probably will change multiple times between now and then.
What Should You Do?
You should review your estate plan as soon as possible. An attorney can make recommendations for you to consider and can discuss any necessary changes in light of the new tax landscape. Your estate plan should be as flexible as possible to make sure your wishes are fulfilled no matter what Congress throws at us in 2011 or beyond.
At a minimum, you need to take advantage of the estate tax planning tools available now. You can never have too much estate planning; only too little. Having too little can result in higher taxes and assets being distributed in unintended ways. Estate planning is not limited to transferring financial wealth, but also includes issues such as who will care for your children or asset protection planning for yourself or your beneficiaries.
While estate planning often deals with taxes, it has much more to do with making sure your wishes are expressed and honored. Families change, needs and interests change, and sometimes your plan should change accordingly. The present tax chaos is a helpful reminder to revisit your estate plan regularly.