And the election is over! But the result is continued uncertainty. We all know that Washington is little changed and gridlock appears perpetual.
The final tally shows that President Obama has been reelected with an electoral vote of 332 to 206 and a popular vote of 51%. The Democrats gained seats in the Senate and the Republicans control the House. Consequently, neither party can push through their vision of the right fix to the fiscal cliff mess. We hope a resolution will come one way or the other, although there is no clear direction for where taxes–especially estate taxes–are headed.
Stephen C. Hartnett, Associate Director of Education for the American Academy of Estate Planning Attorneys, reports that the “free pass” from estate tax that each one of us has is currently $5.12 million, which is part of the Bush tax cuts. But those are going to sunset on New Year’s Eve 2012. On January 1st the free pass drops precipitously to $1 million. Overnight you could have a major estate tax problem.
Not only that, but the economy will immediately suffer from the impact of a bevy of spending cuts and tax increases. The non-partisan Congressional Budget Office has projected that if the Bush tax cuts are allowed to sunset, this will throw the U.S. economy temporarily back into recession.
It is very difficult, even for estate tax attorneys and financial advisors who keep apprised of this topic daily, to know what will happen. President Obama and the current Congressional leaders are scheduled to meet this week.
If Congress does nothing, then the law will sunset and the exemption amount decreases to $1 million. When you think about whether this is problem for you or your family, consider every asset you own or control and add up the values. Add up the equity in your home, your retirement accounts, your brokerage accounts, the value of your business interests, and the life insurance proceeds payable to your beneficiaries (not the cash value, but the death benefits). This is your gross estate. If your gross estate exceeds $1 million, whether for you individually or for a married couple, the IRS stands to be the first person in line claiming an inheritance from your estate.
Lots of opportunities for estate tax planning are available if you don’t want the IRS coming before your loved ones. You can utilize a Marital Deduction Trust, Irrevocable Life Insurance Trust, a Qualified Personal Residence Trust, or a whole host of other trust mechanisms to properly title and manage assets to minimize estate tax.
Keep an eye on the news in the coming weeks. Overnight you could have an estate tax problem. If so, save your family a 55% tax headache and call an estate planning attorney to help you minimize estate tax and maximize what you leave behind for your loved ones.