For the past two years, like Thelma and Louise driving through the country in their fun convertible Thunderbird, we have been enjoying ourselves in the days of a large $5M estate tax exemption and a low top tax rate of 35%. Unfortunately, just like for Thelma and Louise, these heady times were bound to come to an end. At the end of 2012 the estate tax exemption will default back to $1M and the top tax rate will rise back up to 55%. So here we are revving our engines and staring out over the hood of the Thunderbird at the cliff that is December 31, 2012. Are we destined to drive off the cliff or will some kind of legislative miracle save us – and getting Congress to agree on anything will be a minor miracle?
We all knew this day was coming so many made large gifts out of their taxable estate in order to take advantage of the generous exemption amount before it comes to an end. The decision to make such large gifts is unique to each individual as many factors go into it: financial composition of the individual, assets available to gift, etc. Many also took pause because of the potential for a “claw back” tax. I doubt it is a coincidence that this concept takes such a menacing name. The basic idea is that there is a possibility that the government will still be able to collect the taxes you avoided by taking advantage of the high exemption and making an exempt gift in 2012 if ultimately the estate tax exemption is lowered.
Some planners thought that after the election results were in we would get a better idea of how things might play out. Some Republicans want a complete repeal of the estate tax, while others would like to extend the current law. However, as President Obama was re-elected, his plan to lower the estate tax exemption to $3.5M and raise the top tax rate to 45% might be more of a reality. However, he is also fighting hard with Republicans on a plethora of other tax issues, including income taxes. It is possible that the estate tax debate might be conceded by the President in an effort to make gains on other tax policies. There is also division amongst the Democrats about the looming reversion back to the $1M exemption as such a “low” exemption could negatively impact many farms and ranches.
There is still a lot of uncertainty on how the estate tax will play out at the end of this year but as we get closer to the deadline we should start to see how resolved each party is on their position and what concessions will or will not be made. With any luck by the time this article is published in January Congress will have come to an agreement on the estate tax and we can all plan accordingly. Let’s just hope we don’t find ourselves with a white knuckle grip on the steering wheel of our Thunderbird as we fly off the cliff into the default of a $1M estate tax exempt
Christopher Jew- Associate Trial Attorney – Mr. Jew practices in the area of trusts and estates, including estate planning, conservatorships, probate of decedent’s estates and trust administration. He also has extensive experience in probate and trust litigation often involving undue influence and financial elder abuse. Mr. Jew serves as court appointed counsel for proposed conservatees for the San Francisco County Superior Court. Additionally, Mr. Jew contributes to De La Housaye & Associate’s transactional practice, including contract drafting and negotiations.