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2012 Estate Planning Year in Review

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2012 Estate Planning Year in Review “Hey Toreador . she signals, we head for the edge and the first man who jumps is a chicken.” - Buzz to Jim (James Dean) in Rebel Without a Cause (1955) Please visit our Website TALES OF OUR TIMESIMES T O T www.dwmlaw.com universal bartering medium for all goods The Big Screen Version and services was called money. People The dreaded “fiscal cliff” raised the specter of who managed to amass vast sums of Contact us money were able to acquire luxuries that Hollywood’s best depiction of a car as it David J. Backer heads over a precipice and drops in could scarcely be imagined by those who [email protected] struggled to provide food, clothing and spectacular free-fall until it explodes in a John S. Kaminski fireball on the massive rocks in the ocean shelter for themselves and their families. [email protected] The governing council over this faraway surf. The script is straight out of Rebel Jessica M. Scherb Without a Cause, the famous 1955 movie land imposed a tax on people’s money. [email protected] starring James Dean and Natalie Wood. There was a tax imposed on money as it Picture the scene as cast today. Two cars was earned, another tax was imposed on pointed toward the cliff. Behind the wheel of money as it was spent, and yet another tax one car is Senate Majority Leader Harry Reid. was imposed on money that hadn’t yet Maine Behind the wheel of the other is House been spent when a person died and left 84 Marginal Way Speaker John Boehner. Both are revving their their surplus money to their children. The Suite 600 engines, waiting for Natalie Wood (in this rules governing the imposition of taxes at Portland, ME 04101-2480 scene, the role is filled by Nancy Pelosi . or first were simple and everyone understood is it Michele Bachmann?) to give them the them. However, over the course of time Phones: starting signal while the crowd of onlookers the rules became more and more 207-772-1941 cheers them on. Boehner yells out his complicated, until finally, the book 800-727-1941 window to Reid, “Hey Toreador . she containing the tax laws became so Facsimile: signals, we head for the edge, and the first ponderous and the print so small, no one 207-772-3627 man who jumps is a chicken.” We know the could read the laws without a strong outcome - - what began as a rebellious teen magnifying glass and even then, few people challenge ends in death. Awww, who would understood them. People tried to plan have guessed it wouldn’t end well?? The their affairs to earn, spend and give their New Hampshire scene is a classic: http://www.youtube.com/ surplus money to their children in the most watch?v=u7hZ9jKrwvo tax efficient way possible, but every time 100 International Drive they made a plan, the governing council Suite 340 Portsmouth, NH changed the rules. Sometimes they 03801 changed the rules for one year at a time, Alice: “How puzzling all these changes are! sometimes for two years at a time. Phones: I'm never sure what I'm going to be, from one Sometimes they changed the rules 603-433-3317 minute to another.” retroactively. They changed them so often 800-727-3627 - Lewis Carroll, Alice’s Adventures in no one knew anymore what the rules Facsimile: Wonderland would be even weeks into the future . all 603-433-5384 Once upon a time, long ago, in a faraway they knew with certainty was that the rules land, there lived a people who had a complex would change. A new profession came into system of trading goods and services. The being to deal with the ever changing rules: © 2013 Drummond Woodsum & MacMahon tax law guesstimators. Tax law guesstimators 2010 - Unlimited (estate tax “repeal”) became a revered class of fortune-tellers who 2011+ - $1 million practiced their trade by the use of mystical potions, crystals, and secrets unknown to As the estate tax exemption amount grew anyone but themselves. Some spoke in from $1 million to $2 million, and then to tongues. Others fasted for weeks on end to $3.5 million, everyone was confident that enable them to divine the future of the tax Congress would revisit the Bush tax cuts laws. The guesstimators who were most before 2010 to head off the scheduled revered for the accuracy of their predictions repeal of the estate tax. Compounding the were believed to have found enlightenment political, economic and philosophical issues by disemboweling stray dogs in a graveyard inherent in a repeal of the estate tax, with under a full moon. the country facing unsustainable increases in the annual budget deficit, it seemed The House Speaker was jolted out of his sleep improbable that Congress would, by its own by the alarm. He always had such bizarre inaction, let the estate tax be repealed even dreams when he took NyQuil. Fortunately, for one year. After all, the primary impetus his head cold seemed slightly better today. for the Bush tax cuts was the budget surplus that we enjoyed for three consecutive years HOW DIDID THIS HAPPEN? and was projected to continue into the future. But, as 2010 approached, the budget What become popularly known in recent surpluses of 1998, 1999 and 2000 were a years as the Bush tax cuts was originally fading memory. known as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Yet, as the clock ticked down on the final Within months of President George W. Bush weeks of 2009, Congress was focused on a taking office in 2001, with the country awash national health care program and the in budget surplus, Congress passed EGTRRA improbable happened. On January 1, 2010 as a $1.35 trillion tax reduction package that the estate tax was repealed because changed income, gift, estate and generation Congress did nothing to stop it. As a result, skipping transfer taxes. a number of ultra-wealthy families enjoyed a financial windfall from the death of a family The tax law changes of EGTRRA were phased matriarch or patriarch during the one-year in over several years and the law included a repeal. “sunset provision” that, as of January 1, 2011, would return the tax laws to the status that Alice: “Better read it first, for if one drinks existed before EGTRRA was passed. Among much from a bottle marked „Poison‟, it's the Bush tax cuts was a staggered increase in almost certain to disagree with one sooner or the federal estate tax exemption amount (the later.” amount that each person can leave on death - Lewis Carroll, Alice‟s Adventures in to his or her non-spouse heirs, free of estate Wonderland tax). In 2001 that amount was $675,000. A year later, as the repeal was nearing its EGTRRA increased the exemption amount as end and the expiration of the Bush tax cuts follows: loomed over December 31, 2010, 2002 – 2003 - $1 million threatening to return the federal estate tax 2004 – 2005 - $1.5 million exemption to $1 million, the country was 2006 – 2008 - $2 million still in recession and the specter of raising 2009 - $3.5 million taxes was considered a recipe for derailing January, 2013 © 2013 Drummond Woodsum & MacMahon Page 2 any hope of an economic recovery. Two top estate tax rate increases from 35% to weeks before the Bush tax cuts were 40%. This is a “permanent” fix that gives us scheduled to expire, Congress extended the planning stability for the first time in many cuts for two more years (“kicking the can years. The exemption amount will continue down the road”) until December 31, 2012, to be adjusted annually for inflation. taking the first giant step toward the fiscal cliff. As part of the two year extension of the PORTABILITY Bush tax cuts, rather than go from the extreme of estate tax repeal to the extreme Until 2011, if a married couple had an estate of a $1 million estate tax exemption, that was large enough to be subject to Congress set the estate tax exemption at $5 federal estate tax and the couple wanted to million – but only for two years. minimize the estate tax burden on their The second giant step toward the cliff was heirs, estate tax savings provisions needed taken in August of 2011 when Congress voted to be in the estate planning documents of to increase the national debt ceiling by $2.7 the first spouse to die. Unless the federal trillion dollars, required an offsetting $2.7 estate tax exemption of the first spouse to trillion in deficit reduction by the year 2021, die was used by the time of his or her death, and formed a bipartisan “super‑committee” it was lost. Even though the surviving to figure out how to achieve $1.2 trillion of spouse inherited all the assets of the first deficit reduction. When the spouse to die, the surviving spouse didn’t super‑committee failed to reach an inherit the deceased spouse’s federal estate agreement on how to achieve the required tax exemption. The exemption was not deficit reduction, the failure triggered transferrable to the surviving spouse. automatic across-the-board cuts split evenly Beginning in 2011, the estate tax exemption between defense and domestic spending (the became “portable” . transferable to the “sequestrations”), beginning on January 2, surviving spouse. The 2011 law 2013. The confluence of the expiration of implemented portability for only two years the Bush tax cuts as of January 1 and the and was scheduled to expire with the Bush imposition of the spending cuts as of January 2 created the fiscal cliff.
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