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The Montana Estate Lawyer

Saturday, October 15, 2011

Whither the estate tax?

We've been hearing a lot lately about what to expect concerning the federal estate tax, so I thought I'd share a few thoughts.  Of course, everything I say is strictly a guess!

The federal estate tax law with its $5 million exclusion (or "exemption amount") expires at the end of 2012, and we're back to the 2001 law with a $1 million exclusion - unless Congress acts.  What is likely to happen?

It's hard not to be cynical.  Congress seems unable to deal with issues in a mature, thoughtful manner.  Look at how the Administration and Congress threw together the current law last December.  So, this time again Congress is probably going to wait till the last minute and cobble something together.  

I think that it's possible but unlikely that Congress will let the current law expire without taking some action.  However, when I'm helping clients with their estate planning today, I'm advising that we carefully consider how their plan will work if Congress does not act.

If Congress does act, what do the insiders or "experts" predict?  The best case scenario seems to be that the exclusions will stay where they are.  However, many are saying that the the exclusions will be reduced.  Back to $3.5 million for estate tax and even $1 million for the gift tax.  Between the estate tax and the gift tax it's more likely that we'll see a substantial reduction in the gift tax exclusion.  

When will these changes occur?  Probably at the last minute: December 2012.  (Note, however, the Democrats on the "super committee" are floating the idea of reducing the exclusions at the beginning of 2012.)

If the gift tax exclusion does get reduced, what about people who made large gifts while the exemption was $5 million?  Will they find themselves faced with a taxable gift after the fact?  In the words of the tax geeks, will there be a "claw back"?  That is a possibility, although - if I can be a little optimistic - it seems likely Congress would not impose such a Draconian penalty on people who planned within the current law. Still, the safe option for people making substantial gifts is to maintain (or perhaps create through life insurance) liquidity to pay any increased tax resulting from a claw back.

We probably have 14 months to hone our predictions, so I'll leave it at that for now.  I'd like to hear your thoughts.  Am I being too pessimistic?

Keith


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