Dear Michael: We have been approached by our lawyer to complete some very complex planning because of the change to one million dollars in estate taxes from five million the end of this year. As confused as we were before, now we are dealing with LLC's and trusts and loans to ourselves. We are overwhelmed by all of this. We are not over ten million dollars – at six or seven million – but we are certainly not over ten million dollars. We've met with the attorney a few times and have found doing this type of planning is over seven thousand dollars. What's your opinion? – Pulled Apart.
Dear Pulled Apart: There are a lot of firms, out pounding the pavement right now, and pounding the drums about impending doom regarding the estate tax issue.
First of all, let's do a little history lesson to see how the current five million/person or ten million per couple came to be.
Shortly after the turn of the century, the Republicans had a 'super' majority in Congress. This was the time they passed the law that estate taxes would rise from it's current amount of Unified Credit – one million/person, two million per couple – to an unlimited or no estate taxes by 2010.
By 2010, the pendulum had shifted from the Republicans having a 'super' majority to the Democrats now holding this position of power. In other words, when you have the majority of votes to pass a bill and your president is of the same party and way of thinking, you can virtually shove anything you want down the other party's throat. See 'National Health Care' for example.
In 2010, there was a 'sunset' provision on this unlimited amount that could be taxed estate tax free and was due to drop back to one million dollars. Chances were very good at this time – if the Democrats wanted one million dollars to return – to not pass any legislation nor vote for any legislation the Republicans wanted – therefore returning us back to one million dollars per person. This was roughly fifteen months ago.
But that's not what happened at all.
Rather, the Democrats proposed a change to two million five hundred thousand per person, five million per couple and the Republicans countered with having no estate taxes – again – the same as what was in play at the time. All the Democrats had to do – with their majority – was simply not to act at all and the Unified Credit would have returned to one million dollars.
What both parties decided to do was to compromise – likely the last time the full Congress compromised on anything – and they decided five million dollars per person and this law was struck on December 16, 2010.
In addition, they added the benefit of if one spouse should die and without using all of their Unified Credit (the Credit is only used when property passes to someone besides your spouse) the surviving spouse would 'inherit' the unused credit of the decedent spouse – effectively creating up to a ten million dollar credit for the survivor.
Last, but not least, Congress 'reunified' the estate and gift tax. These two taxes are not different taxes – they are the same tax and tax table. A gift tax is used on gifts during lifetime and the second is used on 'gifts' after death (the estate tax). If one wants to give during their lifetime more than the thirteen thousand dollars per person, the excess is then deducted from the five million at death. Easy-peasey simple math.
In order for one to believe estate taxes are changing this fall, you'd have to believe new Democratic party members are going to be swept into Congress again with a 'super majority', and that these new Democrats are going to feel differently about estate taxes than the incumbent Democrats. That's not what's going to happen, as again the pendulum is swinging the other direction toward the Republicans. Were a 'the grass is always greener' type of voters in the U.S. and likely Republicans will gain in Congress.
Whatever the case may be this fall, it's hard to believe Congress will allow estate taxes to return to one million when, again, this current tax bill sunsets. The Democrats already had their chance to have this happen and the worst they proposed was two million five hundred and settled on five million. If Republicans control Congress, we may see a return to no estate taxes.
Firms, whether they be lawyers, CPA firms, insurance agencies, etc., who are using this current sunset provision to drum up business, are doing just that – drumming up business. They are using 'scare tactics' to raise their revenue in 2012, and it's likely unwarranted considering the history of how our current estate taxes came to be. This type of planning is like giving chemo to someone who 'might' get cancer in the future.
Most people in the five to ten million dollar category can wait and see what happens this fall before they jump into a very complicated plan – especially when this plan involves irrevocable trusts, LLC's, etc.
These are estate tools that are easy to get into but impossible to get out of. They are useful 'if' you have an estate tax problem, but you don't have to decide now. You can wait until year-end to determine if you have an estate tax problem or not and then, if warranted, do all this complicated, and very expensive, planning.
Catch up with me next month on "Keeping the Family Farm in the Family".