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As the owner of a privately-held business, you need to do your best to protect your wealth from many factors – one of which is the onerous Federal (and State) estate taxes. Interestingly, the Federal Estate tax has – temporarily – gone away.

The Unthinkable Has Occurred – Estate Taxes are [Temporarily] Gone

Nine (9) years ago, former President George W. Bush passed a sweeping tax reform which included a provision that would incrementally increase the ‘unified credit’ or the amount that any person could pass on when they died without having those assets subject to Federal estate taxation. Baked into this tax law was a provision that virtually guaranteed that an updated set of rules would be passed – there was an odd rule that in 2010 – without further changes – the estate tax would go to $0, or an unlimited amount of assets that could pass to heirs without the penalty of Federal taxation – see chart at end of Newsletter.

The idea that estate taxes would go away in 2010 was a laughable idea for many years. Professional advisor commented that it would never be the case that estate taxes would go away. Many exiting owners fail to appreciate how much their businesses are worth and often times are subject to estate taxes which can strip their heirs of a lifetime of effort.
Losing a Source of Revenue in This Economy

What makes this situation even more incredible is the fact that the United States is in dire need of revenue today to fund our national debt. The United States currently owes $12.3 trillion in Treasury debt to banks, individuals and foreigners (by the way that equals $40,000 per person living in the US today). So, what is puzzling is how the estate taxes were allowed to be repealed. Let’s take a quick look at what happened in the last few months of 2009.

H.R. 4151

In Nov. of 2009, the House of Representatives passed a Bill, HR 4151, extending the exemption amount which was $3.5mm per person (or $7mm for a married couple). During the forming of this Bill, many Republicans were arguing for an increase of the exemption limit to $5mm per person to account for inflation. The House Bill passed with the $3.5 mm, as they seemed content to ‘freeze’ the current rate. The Bill was sent to the Senate as the next step in the law-making process.

However, the battle over Healthcare has consumed the attention of the US Senate and the Bill did not get the attention that it needed. Remarkably, the New Year came and went and there was no change to the 2001 tax changes and estate taxes went away. So what is next? Since estate taxes are unlikely to go away all together, how will this situation resolve itself?

The Sunset Provision

The 2001 changes stipulated that in 2011 estate taxes will return (after the 2010 rate of 0) by having the $3.5 million dollar exemption amount will return to $1.0 mm. Suddenly things don’t look as promising as this change will expose significantly more assets to federal estate taxes. Some commentators have speculated that, perhaps, this is what the Obama Administration would like to see happen . . . to forgoe the revenues for 2010, but substantially increase the amounts in 2011. If the sunset provision triggers, the old rates come back into play and the Government substantially increases the amount of estate taxes.

Before you Make Plans to Die in 2010

What is also possible is that a Bill will pass in 2010 that makes the ‘new’ estate tax rules / limits retroactive to the beginning of the year. This is not without precedent as former President Clinton used this same technique during his tenure in office.

Due to the potential for a retroactive estate tax law, you should not make plans to die to avoid the estate taxes just yet . . . the next shoe has not yet dropped.

A Politically Charged Environment in Congress

The reality is that our two party system is the best and the worst of systems – but we would not have it any other way. At times when the political environment is chared – as it has been for the past few years – anything is possible. We have seen some extraordinary measures taken by Congress in the past twelve (12) months. With two major wars to finance, a bail-out package, a brutal economy, and a fledgling healthcare initiative going through at the moment, who is to say what the fate of the estate tax limits and rates will be? For now, all we can do is be aware of these changes and incorporate them into our overall planning.

For business owners who are thinking about an exit plan and the overall protecting of their wealth, there needs to be some action taken to stay abreast of the changes down in Congress. The purpose of this Newsletter is to raise your awareness to the latest of these trends.

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