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The Tax “Deal” – the Forecast is Dark Clouds on the Horizon

On Behalf of | Dec 16, 2010 | Blog Posts |

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My fellow member of WealthCounsel, Richard Wohltman of Alexandria, VA, posted this relevant commentary on the Tax “Deal” currently being ushered through Congress.

There has been a lot of talk this month 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!



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