Because property values and interest rates are at historic lows and the federal gift and estate tax exemption is at a historically high level, there are currently unprecedented opportunities to leverage gifts and save on estate taxes. These opportunities are very likely to evaporate after the close of 2012 for the following reasons.
First, there is virtually no real dialogue going within Congress, or between the president and Congress, concerning putting in place a compromise plan for 2013 and going forward. Considering that at the end of 2009 we were at a similar juncture, and no action was taken, thus causing the country to be without a federal estate and gift tax for all of 2010, it is very possible that no action will be taken in 2012, particularly in a presidential election year. However, this time the consequence of no action is a huge tax increase rather than a year of no estate or gift tax. (This was later dealt with by Congress through the passage of a tax bill that was retroactively effective throughout 2010). If Congress and the president are unable to agree on a plan, the exemption will automatically revert to the 2001 rates and exemption, namely a $1,000,000 per person exemption and a top tax rate of 55%.
Second, there is great uncertainty regarding the federal estate tax regime after this year. President Obama’s plan is to cut the current $5,120,000 exemption to $3,500,000 million and increase the top tax rate from 35% to 45%. While most of the “experts” were very confident that Congress and the president would come to an agreement in 2009 to put in place a federal estate tax effective in 2010, this prediction proved to be wrong and no plan was put in place. As such, it is just as likely, particularly based on the recent history of our dysfunctional Congress, that no measure will be agreed upon and we will revert to the tax regime that was in place in 2001. (As to the state of Illinois, there is a 16% state estate tax rate and the state estate tax exemption is $3.5 million. The Illinois exemption is scheduled to increase to $4 million in 2013.)
Therefore, in order to take advantage of the now $5,120,000 federal exemption and 35% tax rate, while locking in tax savings that are not likely to be available after 2012, one must act now. If you are interested in discussing how you or your clients might be able to benefit from developing and beginning to implement a wealth preservation strategy in 2012, please do not hesitate to contact me.