Estate Planning Tax Update - Part 1/Change

I want to address some of the Tax Law changes and how they will affect Estate Planning. I was hoping this could be something we all could count on into the future, but, that is not to be. It looks like we will have to get used to the word change, at least for the foreseeable future. This is intended to be a series of short to semi-short writings on different aspects of the new tax law.

Part One - Change

On December 17, 2010, President Obama signed a new tax law that affects every estate plan in some way or another. However, there is no clarity as to how long this new tax law will continue to be in effect. It just happens to sunset, December 31, 2012, which just happens to be a presidential election year. I am too cynical to think that was done by accident.

If President Obama is re-elected, he will likely carry several more Democratic Congressmen and Senators into office with him. In that event, the Federal Estate Tax exemption will likely go down. $2 - 3.5 million seem to be the numbers bandied around. If there is a Republican in the White House in 2012, the federal estate tax exemption will likely remain the same or increase. If nothing is done, the new law sunsets and the exemption reverts to the 2001 level - $1 million.
On top of that, the Illinois Estate Tax Exemption is currently $2 million. Should the Federal Estate Tax find itself somewhere between $3.5 and above in 2012, the Illinois tax will likely remain at $2 m. If the Federal Estate Tax is allowed to sunset, returning to $1 million, the Illinois Estate Tax will likely re-couple with the Federal Estate Tax. That means that Illinois will take a share of the Federal tax amount, instead of maintaining a separate exemption amount.

Either way, it seems that both sides are content to allow this issue to be tossed around like a political football. Will 2012 bring us certainty? Clarity? Or, just more of the same wait and see attitude that has given us the band aid we are living with today?

With all this uncertainty, many people ask, "Why plan?" "Why not wait for some certainty and clarity and then plan?" The problem with that thinking is that even if the Estate Tax issue is settled, other issues will continue to change. The Stock Market, the Economic Recovery, unemployment, marriage, divorce, death, all these things and many more will bring change to everyone's lives.

That is why my practice model advocates updating and maintenance as part every estate plan. Plan for certainty, not destiny.