The objective of this discussion is to review some of the myths and realities of estate planning. A number of articles have been written on the subject but let’s see if we can’t put a different spin on it by keeping it simple. By dispelling some of the common misconceptions, we will have a better understanding of how important it is to take positive action to keep our estate plans in order.

The Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) threw many individuals for a loop when it came to estate planning. Tax laws are never simple but EGTRRA added a level of confusion rarely seen in advanced planning. For instance, between now and 2011 the federal estate tax is scheduled to decrease, disappear and then spring back to life. According to a Wall Street Journal article dated May 11, 2005, the “…current estate tax law puts estate-tax planners in an impossible situation…”. With such uncertainty, some potentially damaging estate planning myths have surfaced. These financial “urban legends” stand in the way of prudent estate planning.

We will address some of the most prevalent and most common estate planning myths so we can be better informed The Law Firm of Steven F. Bliss Esq.

Myth. The Federal Estate Tax was repealed.

The passage of the 2001 EGTRRA provided valuable estate tax breaks. Because of the peculiar way in which the law was written, the Economic Growth and Tax Relief Reconciliation Act also gave some people a false sense of security by leading them to believe that the federal estate tax was repealed in 2001.

The reality is that the current tax law repeals the federal estate tax for only one year, 2010. Depending on the year of death, the estate tax credit amount, the corresponding exclusion amount (which is the amount that each person can pass to beneficiaries free from federal estate taxes) and the top tax rate vary significantly. For instance, in 2009, a person can pass up to $3.5 million to his or her beneficiaries’ federal estate tax free. For 2010 the federal estate tax was repealed. In 2011, the estate tax is scheduled to return with a significantly lower tax free amount, $1 million, and a significantly higher top tax rate at 55%. This quirk in the law is known as the “Sunset Provision” and has caused a lot of confusion among estate planners and their clients.

Permanent repeal of the federal estate tax requires an affirmative vote of 60 Senators. This is not an easy task. After all, repealing the federal estate would eliminate a significant source of federal revenue. Just how much revenue would the repeal of the federal estate tax eliminate? The cost of repeal through 2015 (including the current rates and exemption amounts) is estimated at $290 billion (according to the Joint Tax Committee, a bipartisan group). Other sources have estimated that the cost would be even higher. In addition to the cost of repeal, the federal government has been hit with several large budget items including Hurricane Katrina, the Iraq war and a growing deficit. Additionally, the election cycle always plays a role. Faced with these significant budgetary items, repeal of the estate tax appears to be less likely.

During the summer of 2005, there was much talk in Washington, D.C. of estate tax repeal. At one point, the House of Representatives voted in favor of repeal and the issue was put before the Senate for consideration. 58 Senators (out of a necessary 60) voiced their support for repeal in an informal straw poll. There was a general feeling in Washington, D.C. that the issue of repeal would come to a vote in the Senate. Because of the factors previously listed (Hurricane Katrina, Iraq war, deficit concerns, etc), the issue never did make it to a final vote in the Senate.

As of late 2007, the sentiment in the House and Senate had shifted considerably against repeal. Most experts feel that repeal efforts have very little chance of success over the next two years. This, however, is not the end of the story.

Instead of repeal, reform of the federal estate tax is a possibility. Several key lawmakers were up for re-election in 2008 and they would have liked to see the estate tax issue resolved prior to Election Day. Such did not happen. Almost everyone agrees that something needs to be done to make the federal estate tax more predictable and user friendly. It seems that the current political climate could be the right time for reform. One possible reform is to freeze the 2009 rates and exemption amounts for 2009 and beyond with an exemption amount of $3.5 million per estate and a top tax rate of 45%. Only time will tell what happens, but one thing is certain, doing nothing and waiting for Washington to fix things is probably not in your or your family’s best interests.

From the past, we can predict the future. If history is any indication, we have not heard the last of the federal estate tax, not by a long shot. The federal estate tax dates back to 1797 and has been repealed four times (counting 2010) only to come back to life each time. We all know that historically estate tax has been used as a funding mechanism during times of war. Many well known and respected individuals, historic and contemporary are supporters of the federal estate tax; Theodore Roosevelt, Thomas Paine, Andrew Carnegie, Bill Gates and Warren Buffet to name a few.