Many people work hard all their lives to save some money for retirement and leave some funds for the next generation. If they are careful with their investments and live within their means, this can add up to a few million dollars. A few million dollars is nothing to spend, but it doesn’t put you in the same league as Bill Gates. Owning a small business, having some real estate, and a good retirement plan will often add up over time. The research and consulting firm, Spectrum Group, says that in 2009 there were 7.8 million families with a net worth of $1 million, excluding their primary residences.
Some people claim that these people represent a “privileged” class of Americans, especially during these times of rampant foreclosures and high unemployment. Somehow, success in achieving the American Dream has become a bad thing. I wonder what would happen if everyone felt this way and just stopped working. So all the naysayers should be happy. Of course, there would be no tax money to pay for all the wonderful things the government does for you, but that’s not the point.
In addition to being careful with your money, you also have a responsibility to do estate planning. Estate planning helps control what your heirs get, when, and on what terms. It also helps keep taxes paid at death low. This is not tax evasion. It is paying what you legally owe and nothing more. In order to plan properly, it is necessary for the government to initiate regulations that the public can expect to be stable enough for plans to be projected into the future. After all, no one knows when they are going to die and people cannot be expected to change their estate planning every five minutes.
Under the Bush administration, Congress passed a major tax bill titled the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that addressed a number of estate planning issues. Many provisions of this bill expired in 2010. This would allow Congress to take up the issue and decide what to do in the future. Instead, Congress has let the Act lapse and has thrown everything into chaos.
In 2009, the estate tax exemption was set at $3.5 million. Put another way, estates below that amount did not pay federal estate tax. In 2010, when the EGTRRA expired, there was no estate tax regardless of size. In 2011, the estate tax exemption returns to the pre-2001 level of $1 million.
Unfortunately, most Americans feel that this problem does not have a direct impact on them. After all, only 1 in 160 people who die each year owe inheritance tax. Perhaps these people should rethink their position.
Because Congress lost the ball, the family of Yankees owner George Steinbrenner was able to escape estimated estate taxes of up to $600 million. Combined with the deaths of three other billionaires in 2010, it cost the government $6.5 billion in taxes. In a time of economic recovery, letting this kind of income slip away doesn’t bode well for Washington’s popularity polls.
Second, if we go back to the $1 million exemption in 2011, small businesses could experience “liquidity” problems trying to raise funds to pay taxes. This can lead to the liquidation of many companies along with the loss of jobs. I thought Congress said they were trying to create jobs. You don’t do it by closing small businesses.
Congress will most likely act on this mess and in all likelihood just extend the EGTTRA provisions for a couple more years. Of course, they could have done this in the first place and avoided the problems caused by their mistake.
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