A Cautionary Tale About Uncertainty in the World in Which We Live

When Alice arrived in Wonderland, she found a world where few, if any, of the “rules” from her own world applied. Those of you trying to plan your estates in 2010 can likely relate. In 2009 (aka our “regular world”), we pretty much knew what to expect; on the 2010 side of the looking glass, however, the rules have changed and continue to do so.

In 2009, we had a $1,000,000 lifetime exemption from gift tax, $3,500,000 of estate tax exemption per person available at death, a 45 percent maximum estate tax rate, and a step-up in basis for assets owned at death to fair market value. There were lots of complicated planning tools that we could use to maximize the benefit of these limits but, at the end of the day, we had a pretty good feel for where we stood.

Then the inconceivable happened

We entered Wonderland. In 2010, we still have a $1,000,000 lifetime exemption from gift tax and a new lower 35 percent maximum gift tax rate. However, there’s no estate tax at all, and instead of a stepped-up basis, there is now a carryover basis on assets in a deceased individual’s estate.

It’s not that we didn’t know change was coming; after all, it had been almost 10 years since Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). But never in our wildest dreams did we believe that the one-year repeal of the estate tax in 2010 followed by the return to the prehistoric, or at least pre-EGTRRA, estate tax rules in 2011 ($1,000,000 of estate tax exemption per person available at death and a 55 percent maximum estate tax rate) would actually happen.

Congress would fix it; they had to fix it. So we waited, but nothing happened. For many who delayed planning, a decade of opportunities was lost waiting for Congress to fix the law.

Now, in Wonderland, the rules are temporary and, like the Queen of Hearts, Congress is threatening to change the rules in the middle of the game. There’s even the possibility that the rules will be changed retroactively. Soon another year of planning opportunities will be lost. 

Can we plan in the midst of this uncertainty?

Absolutely! What’s more, we must.

We plan around uncertainty in every other part of our daily lives, so why do we have to know definitively what Congress is going to do tomorrow or next year with the estate tax to plan? We can work with what we do know. We know we have families, investments, and businesses that need a plan to smoothly transition from one generation to the next. We know that asset values and interest rates are still low and that these are useful tools in the estate planning process. We also know that the need for our plan is inevitable.

Many individuals don’t know how their current estate plans work under the 2010 Wonderland rules. Many wills and trusts drafted before 2010 didn’t anticipate the one-year repeal of the estate tax. As such, they could have unintended consequences, such as spouses or children being inadvertently disinherited because the language in the documents is tied to the old estate tax exemption rules.

Estate plans aren’t just about taxes. The best plans start with doing the right thing — the right thing for spouses, children, and the family business. These plans are then implemented in the most tax-efficient way possible. The need to plan hasn’t changed and, each year that we wait for Congress, we lose time that we can’t replace.

We’ll eventually get out of Wonderland. The question is, will we leave prepared for our return to the “real” world, or will we still be waiting?