If you’ve been following the political saga of the estate tax over the past few years, you know something is about to hit the fan . . . again. In fact, the estate tax may turn out to be one of the most important (and divisive) issues as the elections draw nearer.  It’s hard to say what is going to change, or for how long.  Just the kind of thing estate planners–and their clients–hate:  uncertainty.

Even if it’s hard to say what will happen with the estate tax, there still are some fairly likely ways this drama will play out.  This article lays out four possibilities.

  1. Gridlock. Each party pushes and pulls and yet there is no victor, and so we all lose. That is to say that if the current law isn’t extended, updated, or changed, the compromise deal reached in December of 2010 will sunset and the law will revert all the way back to the pre-George W. Bush tax-cuts.  The estate tax will be 55%, and the amount each individual can pass tax-free will be $1,000,000.  That is more draconian than a many pro-tax advocates call for, because it ignores the impact of inflation over the past ten years. That said, Congressman Jim McDermott of Washington has put introduced a bill that would use the 2002 tax rate, but the exclusion would be indexed for inflation.
  2. Stalemate. Perhaps no one will win, but no one will want to lose, either. Instead of kicking the can down the road, they can simply extend the rules that we have now.  President Obama agreed to thos numbers once already, and it’s a far better deal than what will happen automatically if Congress fails to act.
  3. Democrat control of Congress and the White House. Even pro-tax Democrats tend to be leery of huge tax increases around election time.  What they may want to do is raise the tax rate from 35% to 55%, but maintain a relatively high exclusion amount so that most estates will not be subject to the tax.
  4. Republican control of Congress and the White House. Especially if there is a Republican in the White House, there is renewed possibility of a low tax rate and a high exemption amount, if not a repeal of the estate tax.  However, when it comes to taxes, dead people are the easiest targets, so fiscal realities may require even the most tax-averse Republicans to look to the estate tax for increased revenue.

The year 2012 will ulimately be about being alert to the ebb and flow of political tides as we plot the most tax-friendly course we can.  It is important to remember, however, that there things that are even more important than taxes when it comes to charting the course for your finances.  Among them are the peace of mind of knowing that you are in control of your resources and will be able to access them as and when you wish.

You can find more information about estate planning here.

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