The Politics of Estate Planning
Posted on Tue, Apr 13, 2010
Some voters are in favor of the estate tax repeal because they believe that the tax creates unfair double taxation. Others oppose it because they feel that the potential repeal is yet another example of the rich getting richer.
Many advisors, on the other hand, can’t stand the ambiguity of the current estate planning laws because it can be difficult to create quality estate and financial plans based on indefinite laws that expose clients to unexpected taxes.
There is no way to tell where the estate tax will finally end up once Congress addresses the 2011 “sunset period.” What we do know is that the repeal will not be permanent. This option already has the three-fifths majority it would need in order to pass. So the estate tax looks like it is coming back, but where is it headed?
Although we may see movement as early as this year, conventional wisdom says the congressional response to fixing estate tax problems will not come until 2009. Because of the election year politics, this matter will probably be held up with other tax issues, such as income tax cuts and the alternative minimum tax, and neither party is likely to make any pre-election waves. But after the election, Congress will be under the gun to make a decision — so 2009 looks like the year for answers.
Here and Now
The problem we face as advisors is that we still must counsel our clients despite this uncertainty. Changes in family structures, look-back provisions, and insurability problems all force us to give clients immediate answers about estate tax laws that, in all likelihood, will change substantially by the time our financial recommendations are implemented. That said, sitting on our hands and waiting for Congress to address the situation could prove to be very expensive for clients.
As advisors, we have no choice but to make an educated guess as to where the estate tax is headed. We must take a look at the evidence at hand and deliver a forecast. Luckily, Congress has given us some clues as to where the tax rates and exemption amounts will be once this is solidified.
Left or Right?
Perhaps the most interesting thing about this issue is how similar the proposals are from both the right and left sides of the political landscape. Therefore, we should be able to make a reasonable approximation of where things are headed.
The proposal that garnered the most support in the last Senate debate on the issue was from Sen. Max Baucus, D-MT. His estate tax reform proposal included a 45 percent tax on any amounts over the $3.5 million exemption. This would essentially extend the level of reform that will be in place in 2009 through 2012. Of course, because this only runs through 2012, a few years from now will leave us in the same position we are currently in. If this proposal, however, continues to gain
traction, it is very likely to come to fruition.
Baucus’ proposal may have the most support, but there are also others with some strong backing that may have legs when Congress finally tallies up their legislative votes. A proposal from Sen. Jon Kyl, R-AZ, sets the exemption rate at $5 million and caps the tax rate at 35 percent. His proposal should win favor for consistency since the exemption amount he proposes would be indexed for inflation, once again making estate planning a science rather than an art. Although this proposal has
garnered significant support, its major sticking point is that the exemption amounts are not required to be “deficit neutral.” If this issue can be resolved, there is a real possibility that the exemption amount will end up closer to $5 million.
All the recent proposals for revision (with the exception of the widely unpopular full repeal) came between this $3.5 million to $5 million range. However, the election of a populist presidential candidate might embolden some Democrats to take a harder line on estate tax reform. As such, we should be cautious when looking at the low side of exemption estimates for our clients.
It is, of course, more advantageous to hold off on costly estate planning issues until definitive and
stable laws have been put in place. Funding insurance premiums and setting up trusts can prove
costly and may be unnecessary, depending on how the laws work out. However, many clients do
not have that kind of time when it comes to their estate planning, especially if they have issues with
insurability.
But until Congress nails down the specific numbers, the ambiguous laws cannot preclude us from advising our clients. It is important that we share with them all of the facts to help them make informed decisions. Take your clients through the various possible outcomes for the exemption and taxation amounts. Explain what these scenarios would mean to each individual situation, and offer solutions where applicable. We may not know the outcome, but we should still prepare clients for
the various possibilities — this is the sort of counsel our clients value most.
