Posted on October 13, 2010

Why It May be Self-Defeating to Wait for Congress to Change the Estate Tax law before Starting, Completing, or Changing Your Estate Plan

Financier J. P. Morgan was once asked what was going to happen with interest rates.  His answer: “Rates will fluctuate.”

Similarly, if someone asks me what will happen with taxes, be they estate or income taxes, I can most confidently reply that laws will change.  Some years ago, I was preparing a workshop presentation that included a slide showing the number of changes in the tax laws over the last few decades.  It showed a steady pattern of significant new laws changing what was the previous law an average of every two to three years.  I got tired of keeping the slide up to date, so often did it change.

The current estate tax law is set to change on January 1, 2011.  The estate tax law changed significantly in 2000.  It steadily increased the amount that could be passed to non-spouse beneficiaries each year until this year, when the tax became zero.  For this year only.  Next year, it reverts back to $1 million per person that can be passed to non-spouse beneficiaries with no estate tax.  Unlimited amounts can be passed between spouses.  The IRS waits to take its cut until the second spouse in a couple dies.  [This spawned schemes of daisy-chaining spouses ad infinitum, which is apparently okay, unless your spouse is more than 37 ½ years younger than you are.  Younger than that triggers the generation-skipping transfer tax, which is the same rate as the top tier of estate tax; 55%.]

There is a fundamental problem with delaying one’s plans in order to sync up with the current law.  The assumption behind such (in)action is that somehow estate planning is a once-and-done exercise.  Let me analogize.  A new car off the showroom floor will take you anywhere you want to go.  That same new car, unmaintained, soon will take you nowhere.  So it is with your estate plan.  Unless there is a commitment to systematically keep your plan updated, I can guarantee you that unless your demise occurs fairly quickly after creating it, it will be outdated to some extent.  To the extent your plan is outdated is the extent to which your vision for the future will be frustrated.  To think otherwise is an exercise in denial.

In life, there are never solutions, only trade offs.  If you want your vision for the future to have a better chance of coming true, you need to commit to systematically updating your plan.

It is my experience that few law offices are structured to make this happen easily.  My office offers a different alternative: commitment to updating at the time the plan is created.  This is not the normal expectation from most estate planning attorneys.  Therefore, most clients are unprepared for this type of approach.  It is offered as an option with me.  I will not force a client to take this path if it seems contrary to their perceived interests.  But given the certainty of change in the laws, it is an option that is worthy of serious consideration.

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3 Responses to “Self-Defeating”

  1. last few days our group held a similar talk on this topic and you point out something we have not covered yet, appreciate that.

    – Lora

    • admin
      Nov 05, 2010


      Thanks for your comment. Glad I could help.


  2. Vidas
    Feb 23, 2012

    Right on! To answer your question, they pay a better tax rate because they have sweetheart deals with congresspeople who write the tax laws in their favor.