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fall 2006 |
The Estate Tax: Making Sense of an (Un)Changing Environment
By Gregory B. MannYou've heard it before: “If you fail to plan, you plan to fail.” But how do you make a plan when the rules may — or may not — be changing? In this mid-term election season, the estate tax has once again become the political football of choice for many candidates. At one end of the playing field are those who seek to abolish what they have labeled as an unfair “death tax” that stifles entrepreneurship and hurts family-owned businesses. At the other end are those who worry that reducing the estate tax will not only increase the federal deficit but also lower incentives for individual charitable giving, while at the same time offering tax breaks to the wealthiest Americans. Caught in the middle are families with estates of $2 million or more (including life insurance holdings) who are trying to plan their financial futures in an uncertain fiscal and political environment. A Bit of HistoryThe federal estate tax has always been subject to debate. However, with the leadership change following the U.S. presidential election in 2000, the debate moved to center stage. Unable to push a complete repeal of the estate tax through Congress, the Bush administration sought a compromise that would gradually (but temporarily) reduce tax rates and increase exemptions through 2010. In 2011, they would return to levels similar to those in effect when the tax bill was passed in 2001. For example, in 2006 and 2007, an individual may pass up to $2 million free of federal estate taxes, while facing a maximum federal tax rate of 46% in 2006 and 45% the following year. This exemption will increase to $3.5 million in 2009 and will become unlimited in 2010, when the estate tax will be repealed altogether, but for that year only; in 2011, the exemption and top tax rate will return to 2001 levels ($1 million and 55%, respectively). Annual exclusion gifts, lifetime gift exemptions, generation-skipping transfer tax exemptions, credits and deductions for estate taxes paid at the state level—these and other financial issues have all been affected by the changes made in the federal estate tax rules. Since the 2001 compromise, various attempts have been made to enact permanent changes to the estate tax. Most recently, legislative bills in the House of Representatives, designed to repeal the estate tax altogether, have passed by significant margins. However, they have all been voted down or become stalled in the Senate — including efforts to address estate tax issues in recent federal minimum wage and pension bills. Taking Action amid Congressional InactionAll of this congressional inaction appears to leave individuals and families in somewhat murky waters, forced to make difficult estate planning decisions with limited and uncertain information. Certainly, no one has a crystal ball that offers a clear view into the future. However, given the history of the debate and the current economic and political environment, it seems increasingly doubtful that a full repeal of the estate tax will occur. For the foreseeable future, the estate tax — in one form or another — will likely be with us. With that in mind, effective planning should remain a vital concern for those whose estates exceed $2 million (including life insurance holdings). Given the current rules, individuals and families would be wise to look carefully at business succession planning, asset and creditor protection planning, probate avoidance, state estate and inheritance taxes, and other issues. These important areas should be addressed now in order to minimize potential taxes, risks and conflicts down the road. Perhaps more than ever, the ongoing debate surrounding the estate tax is a strong reminder that failing to plan really does mean planning to fail. We encourage you to contact a Much Shelist attorney to help ensure that your estate plan will allow you to meet your personal financial objectives in light of the current estate tax environment — and that revisions can be made quickly and effectively as circumstances change.
Provided as a service to our clients and friends. If you have questions or would like to suggest a future topic, contact Michael C. James, Editor, 312.521.2123 or mjames@muchshelist.com.
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Gregory B. Mann, Vice Chair of the Wealth Transfer & Succession Planning practice group, designs and implements estate and gift tax plans for individuals and family groups. His work also includes implementing succession planning techniques for closely held corporations, administering probate estates, income tax planning, and preparing gift and estate tax returns. Greg can be reached at 312.521.2461 or