In honor of election day, I thought I’d write a quick post about the impact of politics on estate planning.
One consideration in crafting estate plans for clients is how the federal and Massachusetts estate taxes will impact the legacies that they leave to their families. Currently, a federal estate tax is levied on decedents with taxable estates in excess of $5.12 million. Here in Massachusetts, there is a state estate tax levied on decedents with over $1 million. While the Massachusetts amount has been steady for over a decade, the federal exemption amount changes frequently.
In 2002 the federal estate tax exemption amount was $1 million, then it rose every two years, until it reached $3.5 million in 2009. In 2010 there was no federal estate tax, and now in 2012 it is $5.12 million. However, unless Congress takes action, the exemption amount is set dwindle back to $1 million in 2013. At the same time that the exemption amount changes, the percentage of the tax levied changes as well.
So why isn’t there a permanent solution to the estate tax issue?
My personal opinion is that the estate tax is a political fundraising tool. Republicans claim that they want to eliminate the estate tax, but that isn’t their only motivation. Wealthy individuals, who pay the vast majority of estate taxes, are likely to donate to politicians that advocate eliminating this tax. But what would happen if the tax were eliminated? Those same politicians would no longer have the estate tax issue as a mouthpiece to solicit campaign donations. The same factors prevent Democrats from seeking to raise the estate tax to uncharted levels, lest they forgo their own donations from wealthy patrons.
Beyond campaign fundraising, the estate tax is also a political bargaining chip. For example, the exemption amount was set to revert to $1 million in 2011, but Congress raised is to $5 million. Why? Because in the same bill Congress also agreed to extend unemployment benefits at the request of the President; a political quid pro quo. And you can bet that the politics will not end anytime soon, regardless of who wins today’s election.
Of course, there are methods to reduce or eliminate estate taxes that don’t rely on waiting for Congress and the President. A healthy dose of cynicism and a discussion with a Massachusetts estate planning attorney could get you there.