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The Demise of Estate Planning

Should you put your estate planning on hold while Congress and President Clinton spar over repealing the estate tax? Would the demise of the “death tax” eliminate the need for estate planning?

I suppose a balanced answer to these questions is “yes, no, maybe so.”

Perhaps the starting point for answering these questions is to assess the odds of repeal. In my September 1999 column, I discussed the political posturing that resulted in last year’s aborted “repeal” of the estate tax. I predicted that the end result would be a modest decrease in the top estate tax rate (from the current 55% to perhaps 50%) and an acceleration of the already scheduled phase-in of the lifetime exemption (currently $675,000, increasing to $1 million in 2006).

Since that time, the grass roots support for estate tax repeal has grown. The issue has received unparalleled attention in this election year. So, I will modify my prediction. My crystal ball predicts an increase in the lifetime exemption to as high as $2 million and a decrease in the top tax rate to as low as 45%. I do not expect any legislation to be effective until next year at the earliest, and there likely will be a drawn out phase-in of whatever gets passed.

In the meantime, changes in the economy and the projected size of the budget surplus, along with the results of the presidential election, could have a dramatic effect on the outcome of the legislative process. There also may have to be some tough choices between death tax repeal, marriage penalty and alternative minimum tax relief and numerous other tax goodies that our elected representatives currently are posturing to pass out in anticipation of the November elections.

What if you disagree with my predictions and believe that Congress and future President Bush will repeal the estate tax? Or, what if you project that your net worth at death will be covered by a generous exemption from tax? Should you put your estate planning on hold and wait to see what happens?

The answers depend upon your definition of “estate planning.” Clearly, the nature and need for estate tax planning will change for some people. If you do not aspire to have a taxable estate, you don’t need sophisticated estate tax planning. The problem is that it doesn’t take much to have a taxable estate, especially if you predict any significant asset-value growth between now and the time you die. Ten years from now, a $2 million exemption may not sound like much.

Reducing or eliminating the estate tax certainly will decrease the tax motivation for lifetime asset transfers. But, there is a subtle issue that must be addressed. Many people drag their feet with estate planning hoping for something to change in their lives. Give my kid a few more years to grow up and he’ll be ready for the responsibility of what I might give him. I want to wait until I’m ready to retire before I give away my business’ stock. Maybe a few more years of experience will prepare my daughter to take over leadership of the company. And, maybe Congress will repeal the estate tax someday. There are more reasons to delay estate planning than there are pages in the estate tax law.

Tax laws, family members’ abilities, your net worth, the business and everything else will change over time. If you wait for absolute clarity, you’ll never undertake estate planning. And, that is the rub because there is far more to estate planning than simply reducing taxes.

Family business owners know that some of the toughest estate planning issues have little to do with estate taxes. How do I treat my children equally when the best business answer is not to require them to be partners in the family’s business? Who should have voting rights and control? How do I instill moral and social values and work ethic? Will my kids accept their stewardship responsibilities if and when I leave the business to them? How can I teach my kids how to manage wealth?

Take away the estate tax and you have less incentive to work toward resolving these and other key issues affecting long term family harmony and business continuity.

Don’t get me wrong. I am not lobbying in favor of the estate tax as a motivator for important lifetime actions. It is a counterproductive tax that encourages unproductive and unnatural activity. But, please do not think its outright repeal will necessarily eliminate the toughest estate planning issues that you face. Do not allow potential estate tax relief to lull you into a false sense of security that justifies delaying addressing important non-tax issues.

What to do while we watch this saga unfold? I believe that the best answer for most people is to continue with their planning. The best estate planning has always incorporated flexibility to deal with changing circumstances, whether related to family, business or tax laws. Nothing less is required today. As long as your estate tax planning is in line with your non-tax objectives, it should be appropriate even if there is no estate tax at some later date. The key is not to lose focus on the non-tax objectives.

Mark Twain’s famous quote, “The reports of my death are greatly exaggerated,” seems particularly apropos. Even if the estate tax dies, estate planning will remain a necessity. And, by the way, what Congress giveth it can taketh away! The estate tax has been repealed and reinstated several times in its long and tortuous history. Stay tuned.




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