The great recession has caused a lot of people in this country a lot of pain and stress. People worry about their jobs, their retirement plan and their overall quality of life. One thing that the majority of the general population has not had to worry about is estate taxes. However, estate taxes may well be added to the list of stressors which our friends, family and clients may have to deal with. Circle December 31, 2012 on your calendar, because that will be the drop dead date when we will know just what kind of estate taxes the country will be dealing with in the future.
For the uninitiated, estate taxes are a tax that the government places on your assets when you pass away. Historically, the estate tax rate hovers around 50% which is especially hard to swallow when you consider that the assets you’ve accumulated have already been taxed once. The saving grace of the estate tax regime is that the government allows each person an estate tax exemption. This exemption allows each person to pass a certain amount down to their loved ones without being subject to this tax. At the end of 2012, the current exemption is set to be reduced by 80%, barring any legislative action from Congress.
A quick history lesson for context. In the 1990’s, the estate tax exemption was roughly $600,000 per person. This number slowly rose to $1,000,000 per person in 2001, at which time George Bush initiated sweeping tax cuts across the board. Over the past decade, the estate tax exemption rose steadily from $1,000,000 in 2001 to $3,500,000 in 2009. Due to Congressional inaction, the estate tax actually lapsed in 2010, allowing mega-wealthy decedents like George Steinbrenner to pass billions down to their beneficiaries without paying the going estate tax rate of 45%. Eventually, Congress passed a two year extension of the Bush Era Tax Cuts. This extension reinstituted an estate tax exemption of $5,000,000 per person. Because of the Bush Era Tax Cuts, the estate tax now affects less than half a percent of the U.S. population. But all of this is about to change.
The Bush Era Tax Cuts are set to expire at the end of 2012. If Congress does not extend them or pass another law governing estate taxes, the $5,000,000 exemption we all currently enjoy will drop back down to $1,000,000. This means that many more people will be subject to estate tax liability when they pass away. The estate tax becomes a tax not only on the very rich, but on the upper middle class as well. The moral of the story here is “Pay more attention, pay less taxes.” We don’t know what Congress is going to do in this coming year but there is a significant chance that they will do what they do best: nothing. It pays to meet with your estate planning attorney, accountant or financial advisor to review your situation and to come up with a game plan. There are many things they can do to reduce your estate tax liability but it requires time and planning. Having a game plan in place will help you to be prepared no matter what curveballs Congress throws at you.
Brian Y. Chou is an associate at the Law Firm of Barth Calderon, LLP in Southern California. He specializes in estate planning, asset protection, and estate administration.