A question that now comes up
often is, "Why does anyone still need an Estate Plan?" If the Estate
("Death") Tax is going away in 2010, why should we continue to make
gifts to avoid these taxes and/or purchase insurance that will replace
capital that is lost to this tax? It’s a good question, and one many
successful investors who have done good planning are asking. The chart
below shows the current schedule of the estate tax phase-out under the
legislation passed in 2001.
Here are three
reasons you may want to hold off on the confetti and champagne
concerning this issue:
War and Security Costs.
Clearly 9/11 has had a very negative effect on our economy. Far greater
most likely, than the perpetrators ever dreamed it could. The net result
has included falling and nervous securities markets and a
surplus that has returned to another deficit. If EGTRRA (The Economic
Growth and Tax Relief Reconciliation Act of 2001), which does away with
the estate tax, had not been passed before this tragedy, it is unlikely
it would ever have seen the President’s desk. The added costs of
security through new government agencies and the war with Iraq also have
large numbers associated with them. In addition, cities and states
around the country have been saddled with a great deal of the security
costs and are facing budget crises with pressure to find new sources of
revenue. Most, if not all states have provisions that allow them to also
tax estates if needed.
Demographics. The aging
population of the country is putting tremendous pressure on the sacred
programs of Social Security and Medicare. The numbers do not lie. We
simply have too few workers to pay all retirees. These two issues are
likely to be in every political campaign speech outline over the next
twenty months. You can hear the cry of "tax breaks for the rich" echo
even now as the candidates warm up. One obvious source of revenue to
offset the shortfalls in these untouchable programs will certainly be
taxes on estates.
Politics. During the
debate of the phase-out issue in 2000 and 2001, the politicians did not
go out of their way to highlight what happens in 2011, the so-called
"sunset provision." In other words, the law reverts back to its pre-2001
status with a 55 percent top tax rate and its 2002 exemption amount of
$1 million. The "death of the death tax" may have been greatly
exaggerated. This should come as no surprise. There are endemic factors,
such as the lack of congressional term limits, which will perpetuate
this situation. The administration in power will largely dictate the
monetary and fiscal policy and the estate tax will always be on
the table for discussion.
So now what? It is clear,
under the current regulations, that the most advantageous year to die is
2010. All joking aside, the prudent course would be to move forward as
though you will live well beyond 2010 and plan your estate as though the
sun will indeed set on this "gift" from the government. There are too
many dark fiscal clouds on the horizon to believe that estate tax relief
will be a permanent fixture in the tax code. If it has been determined
that estate tax liquidity is a problem and that life insurance is a good
solution for you, it would be careless to delay its purchase and risk
that a future health issue might prevent its acquisition. Also, the
insurance premium will increase with each year of delay. So, whether
your strategy involves gifting, asset repositioning, or insurance, stay
the course to assure proper estate stewardship.
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©2007 JWA Financial Group, Inc. All rights reserved
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