As an estate planner, this is a very confusing time. Why? With the upcoming election and continued Congressional gridlock, no one seems to know exactly what our federal tax code will look like in 2013. In addition, the further implementation of the Patient Protection & Affordable Act ("Obama Care") will have tax implications that will affect estate planning now and in the future. The Presidential and Congressional elections are essentially a public referendum on how we as a nation wish to see these issues resolved. Given all of that uncertainty, let's take a look at what we know and what we don't know.
Unless Congress acts, we face what has been politicized as the "Fiscal Cliff". This refers to two events that are to occur after 12/31/2012: (1) the "Bush Tax Cuts" are due to expire; and (2) automatic across the board cuts in government spending will begin. The impending Fiscal Cliff is a direct byproduct of Congress' inability to agree on what to do about federal spending, revenues and increasing the federal debt ceiling.
Congress and the President must work together to resolve a multitude of issues regarding: the national debt and how to generate future revenue for government spending; future tax policy and how that will affect economic growth; controlling federal spending; and agreeing on how to fund or modify federal entitlement programs. Inaction is holding the economy back and the choices that are made today to address these issues will have a profound effect for the next 20 years.
The Presidential and Congressional elections are essentially a public referendum on these issues and will likely determine how they are resolved at least in the near term.
If nothing is done to stop the impending tax law changes, the following will occur:
Other changes, that are due to take place in 2013 that are not part of the expiration of the "Bush Tax Cuts" include:
From an estate planning perspective, we don't know:
Our recommended approach is to plan for the worst and build in flexibility. Possible strategies in a low tax environment that will soon become a high tax environment include:
It is important to note that the last time we faced an impasse on the budget, the deficit and taxes, Congress, during the lame duck session, passed a two year fix. It was this bill that extended the "Bush Tax Cuts" and gave us a $5,000,000 gift and estate tax exemption. Whether a similar bill will be passed this year will depend on many factors including the November election results.