There has been a lot of polarization on Capitol Hill regarding the national debt, and much of it came to a head during the recent efforts to raise the debt ceiling. But in spite of the widely differing perspectives that exist, both parties did agree that spending must be reduced.
Where there is disagreement is the matter of increasing revenue as part of a two-pronged approach toward reducing the federal deficit. “Increasing revenue” is another way of saying raising taxes, and of course it is “the rich” who are being targeted for potential tax increases. Anytime you hear this type of talk, you should immediately recognize that raising taxes on those perceived as being wealthy is probably going to have a direct impact on your estate plan.
There is an opportunity looming for those who would like to see an increase in revenue at the expense of those who have been able to achieve some financial success during their lives. The Bush era tax cuts were extended at the end of 2010 via the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This act is scheduled to expire at the end of 2012, which is of course an election year.
If this tax act is allowed to sunset as scheduled, the rate of the estate tax will rise to 55% from its present rate of 35%. This is a rather stunning figure that can be hard to wrap your head around. The clincher is that the estate tax exclusion will be reduced from the $5 million that is in place right now to just $1 million. So, at the beginning of 2013 the portion of your estate exceeds $1 million will be taxed at a rate of 55% as the laws stand on this day.
As the smoke clears, the reality is that the deal to raise the debt limit did not impact the estate tax parameters. But, since the impetus toward increasing revenue still remains, it would come as no surprise to see some people on Capitol Hill calling for some of that revenue to come from increasing the estate tax at some point.