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Estate Planning in Uncertain Times

It is widely recognized that the federal estate tax laws must and will be revised.

The current law was enacted in early 2001 shortly after President Bush was first elected President. At that time the United States enjoyed a budget surplus in the area of $400 billion, and Alan Greenspan, Chairman of the Federal Reserve, advised Congress that he contemplated that in approximately 15 years the entire federal debt would be paid off and eliminated!

The economic outlook was particularly rosy in early 2001. Therefore, noting the budget surplus and at the urging of President Bush, Congress promptly passed a $1.4 trillion dollar tax cut, which included a substantial reduction in estate taxes. However, to conform to budgetary restrictions the estate tax reduction was limited to the following 10 years.
Briefly, the exemption from the federal estate tax was increased to $1 million for 2002 and 2003, $1.5 million for 2004 and 2005, $2 million for 2006, 2007 and 2008, $3.5 million for 2009, and in 2010 the federal estate tax is to be revoked. However, in 2011 and thereafter the federal estate tax is to be reinstated with an exemption of only $1 million!

As a result of the provisions for revocation and then reinstatement of the federal estate tax, it is generally accepted that in the next several years the estate tax laws will be revised. However, it is essentially a political decision as to what changes will be made. At one time the Democrats were willing to accept an estate tax exemption of $3 to $3.5 million and the Republicans were willing to accept far less than total revocation of the estate tax.

With the reelection of President Bush and the increase in Republican control of Congress, it appears that if a new estate tax law is enacted prior to the next election that the federal estate tax exemption will be fixed at not less than approximately $3.5 million. This is not to say that the exemption will be increased immediately, but only that whatever exemption is fixed will apply with respect to 2009 or 2010 and thereafter. No change in the exemption for the prior years is anticipated.

There are several reasons why full revocation of the federal estate tax does not appear plausible. A primary reason is that economic circumstances have materially deteriorated since early 2001. We suffered through a recession with major stock market losses, we are now engaged in the war on terrorism, we were involved in the war in Afghanistan and we are now deeply enmeshed in the war in Iraq. Moreover, the dollar has substantially declined relative to the Euro and many other foreign currencies and we are sustaining major trade and budget deficits. In short, the rosy economic glow of early 2001 has diminished considerably.

Another reason for doubting full revocation of the estate tax is the recognition that it would change the nature of our society. Success in America is based on work and achievement. We are a meritocracy and not a royalty. To fully revoke the estate tax, especially for persons with $50 to $100 million or more, would be to create a type of royalty. Moreover, many persons would view revocation of the estate tax as an effort to protect the interests of the ultra wealthy and contrary to the long term interests of our nation.

It might seem difficult to undertake estate planning during such uncertain times. However, this is not really the case. The general rule should be to undertake such estate planning strategies as may seem appropriate, but to avoid incurring any gift taxes inasmuch as the estate tax exemption might be considerably greater in the future, and that as a result estate taxes possibly avoided. Moreover, there are many estate planning strategies available that will not result in gift taxes.

It is noted that some estate planning strategies not only result in estate tax savings but also in protecting assets for heirs and beneficiaries, such as protecting assets from creditors, a future spouse and the inclinations of immature children. Therefore in addition to saving estate taxes, estate planning should be considered in the broader sense of serving the needs of the family and all of its various members.

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