The enactment of the Tax Act of 2001 has introduced a considerable amount of uncertainty into the estate planning process.  Under this new law, the federal estate tax (FET) is only repealed for the year 2010, unless the Congress in session at that time takes the initiative to finalize the repeal.  Predicting who will be in control of Congress almost a decade in the future, as well as what the monetary requirements of the government programs and the actual budget surplus/deficit will be at that time, is, of course, impossible.

The year following 2010 (the one year the the FET is actually repealed) is the year that the first baby boomers reach age 65 and become entitled to Social Security and Medicare.  The demands on the Treasury in the years that follow will be substantial.  A look at recent history tells us that Congress changes the tax law almost every year.  If the demands for government services rise, increased taxes are almost certain.

ESTATE SETTLEMENT COSTS

If we are dealing with the question of liquidity for estate tax purposes, most of the reductions to the FET do not come until the year before the repeal (2009) when the applicable exclusion amount reaches $3,500,00. 

PLANNING FOR THE FUTURE

Regarding liquidity to pay potential estate settlement costs, some have said you can make a "little mistake" or you can make a "big mistake," and only you can choose which.

If you adhere to the argument that the estate tax will probably be reinstated (it affects a very small percentage of the voting public), you will likely create (or retain) an estate plan that provides for sufficient liquidity for your estate to pay the anticipated federal estate tax.

Alternatively, if you take a more optimistic approach and feel that finally Congress has given us a good law and whoever controls the legislature in 2010 will likely vote to finalize the repeal and you feel you are likely to live another ten years, liquidity to pay a federal estate tax would not factor into your estate plan.

The second approach certainly will appeal to some, but for those who have spent a lifetime building an estate, which they would like to pass to their heirs, will find it fraught with uncertainty.

The "little mistake" would be to plan that the 2010 Congress will not repeal the federal estate tax.  If it is repealed, you will have extra liquidity to benefit heirs and /or your favorite charity, or use for your own retirement.

The "big mistake" would be to plan that the federal estate tax will still be repealed in 2011 (it currently only dies for the year 2010) and not provide for sufficient estate liquidity. Since many people use life insurance to provide liquidity for estate taxes, they must consider whether or not they will be in poor health in 2011 and thus precluded from using this liquidity tool.  Even if they are in good health, the annual premiums will likely be much higher than they are today.

WILL THE FEDERAL ESTATE TAX REPEAL LAST?

Prior to June 2001, only two percent of persons dying were subject to any federal estate taxes.  During 1997 about one-half of all death taxes imposed were on the wealthiest one person of every 1,000 who died.  This 1/10th of 1% of the population will, of course, benefit the most from the repeal of the federal estate tax.

Estate tax laws were enacted in 1797 (Federal Stamps for Wills and Estates), 1862 (during the Civil War) and 1898 (to pay for the Spanish-American War).  These were all repealed a few years later.  Our current law was enacted in 1916 and has been frequently modified over the years.  Will it change again even before the repeal scheduled for the year 2010?  If not, will the Congress then in session have the votes required to finalize the repeal?  And if they do, will the President veto their bill, as President Clinton did in the Year 2000?