Estate Taxmageddon Series, Part I: Why You Need to Plan Before Going Over the 2013 Fiscal Cliff
What do Congress and Hugo Chavez have in common?
A 10 percent approval rating.
That’s right, America likes it’s own elected representatives as much as the revolutionary socialist president of Venezuela.
You like this guy more than the people you chose to run the country.
To put that in perspective, the IRS – as in, the people who take your money, that IRS – has a 40 percent approval rating. At least, that was the case as recently as last month.
According to the LA Times’ David Horsey, this fuzzy feeling is rooted in the fact that “the 112th Congress has passed far fewer bills than any Congress in recent years. Our current crop of lawmakers may, in fact, have achieved the lowest productivity of any Congress in modern history.”
Which is why John Boehner admitted he is “not confident at all” at the prospect of completing a deal to avoid the looming combination of automatic tax increases and spending cuts that has become so charmingly known as the “fiscal cliff,” or if you prefer the more subtle, “Taxmageddon.”
Whatever you call it, the situation is dire.
Even if one party miraculously manages to seize all of the major political offices at stake in the November election, Congress will then have mere weeks to take substantive action – which, as Horsey points out, isn’t really their strong suit.
If the status quo holds and the fiscal hammer falls, our estate planning options beyond 2012 are going to be hit hard. As of now, the federal exemptions from the gift, estate, and generation-skipping transfer tax stand at a favorable $5 million with a 35 percent top tax rate.
President Barack Obama has proposed to reduce that tax exemption to $3.5 million and jack up the top rate to 45 percent, while challenger Mitt Romney wants to axe the estate tax altogether and preserve the 35 percent gift tax rate.
Neither plan will matter if Congress continues to play dead. Without legislative action, in 2013 the exemptions will be slashed to a mere $1 million and the top tax rate will rocket to 55 percent.
Even if a plan closer to Romney’s dictated the deal, we would still be unlikely to maintain our current tax advantages next year because of the compromises it would require to pass. But rather than standing passively on the sideline as Congress wrings its hands in indecision, we can step in and act now.
There are 104 days until 2013. If you allow two weeks for me to outline the strategies available to you in a series of blog posts, we’ll have 90 days to create a plan.
That’s not a lot of time to do something that most people seldom consider. Kids assume money just happens, like rain, as long as Mom and Dad are around; Mom and Dad assume the kids’ spending, like tsunamis, will drown them before they can even consider retirement funding.
Meanwhile, polls like this emerge, showing that 40 percent of youth under age 22 expect to inherit from their parents so they don’t need to plan for retirement and that 84 percent of those parents expect to leave little or nothing to their children.
That means (a) that there are going to be a lot of grumpy 65-year-olds in 40 years, and (b) that if Congress doesn’t wake up, there may be even more.
We’ll start talking strategy on Friday. Until then, good luck and good hunting.
This is the first post in a series discussing the advantages of estate planning in 2012. Click to learn more in Part II, Part III, and Part IV.
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