Ain't Necessarily So

Estate-Tax Plans Get Trickier in the weekend WSJ suggests that estate planning has become immeasurably complex because, as currently drafted, the estate tax is scheduled to disappear in 2010 and then bounce back again, at higher rates, in 2011. The article focuses on the problems inherent in measuring how much life insurance estates, particularly modest estates, will need as part of an estate plan.

The article is needlessly alarmist.

No one, least of all me, has a perfect crystal ball when it comes to predicting what Congress will do. But it's virtually a slam-dunk, sure bet that the scheduled reversion of the estate tax to the 55% rates and $1M lifetime credit of 1997 will never take place. It is only a shade less likely that the lifetime credit will, after its increase to $3.5 million, be reduced. Thus, the only real uncertainties are:

1. Can any compromise be enacted early enough to avoid the zero estate tax in 2010? Let me suggest that this issue causes only a limited degree of planning uncertainty, since few clients are focusing their planning efforts around the fact that 2010 will be their year of demise. If no compromise is enacted by 2010 and your client dies in that year, it only means that his or her heirs hit the Estate Tax Lottery Jackpot. If that is the case, it is unlikely that any tax practitioner will have to answer to an unhappy client for failing to correctly predict the state of the law three and a half years in the future.
   


2. Will the estate tax rates be higher than they are currently? At best, this is a minimal factor in the estate tax planning for most clients, since any increase in rates is likely to be more than offset by a hefty increase in the lifetime credit and by other, new, planning devices built into any compromise.


3. How high will the lifetime credit go? Again, this would seem to create only a limited degree of planning uncertainty for most clients. After all, if we assume that the $3.5 million credit is, as a practical matter, a floor for any compromise, then the only families exposed to any estate tax after a compromise is reached are those with family wealth well in excess of $7 million. My suspicion is that relatively few readers of even the WSJ fall into this category.

A more interesting question is why the article was written in the first place. Let's try to guess.

The current estate tax law provides a huge subsidy to the life insurance industry. Virtually any change in the law will dramatically reduce the market for such insurance. Hmmm.

Of the 16 paragraphs in the article, 14 discuss the use of life insurance in estate planning that has, as its principal goal, tax minimization. Could it be that the article was nothing more than the fruit of efforts by insurance industry flacks attempting to sow panic among the wealthy in order to get in a few last licks?

Nahhh.

Hat Tip: TaxProf