July 1, 2022

Finance Matters: Estate Taxes and Your Government Absent From Work

Lots of people work hard all their life to put some money away for their retirement and leave behind some funds for the next generation.  If they’re prudent with their investments and live within their means, this can total a few million dollars. A few million dollars is nothing to scarf at, 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 folks claim 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 turned into a bad thing. I wonder what would happen if everyone felt this way and simply stopped working.  Then all the naysayers should be happy.  Of course, there wouldn’t be any tax money to pay for all the wonderful things that the government does for you, but that’s besides the point.

A part of being prudent with your money is the responsibility of doing some estate planning. Estate planning helps control what your heirs get, when, and on what terms.  It also helps in keeping down the taxes paid at death.  This isn’t evading taxes. It’s paying what you legally owe and no more.  In order to properly plan, it’s necessary that the government initiate regulations that the public can expect will be stable enough for plans to be projected into the future. After all, no one knows when they are going to die and people can’t be expected to change their estate planning every five minutes.

Under the Bush Administration, Congress passed a major tax bill entitled the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that dealt with a number of estate planning issues. Many provisions of this bill were set to lapse in 2010. This would allow Congress to take up the matter again and decide what to do in for the future. Instead, Congress has let the Act lapse and thrown everything into turmoil. 

In 2009, the estate tax exemption was set at $3.5 million. Putting it another way, estates under that amount paid no federal estate taxes. In 2010, when EGTRRA lapsed, there was no estate tax regardless of the size. In 2011, the estate tax exemption returns to the pre-2001 level of $1 million.

Unfortunately most Americans think this issue has no direct impact on them. After all, only 1 in 160 people who die a year owe estate taxes. Perhaps these people should rethink their position.

Because of Congress fumbling the ball, the family of Yankee owner, George Steinbrenner, was able to escape estate taxes estimated 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 revenue get away can not bode well for the popularity polls in Washington.

Secondly, if we return to the $1 million exemption in 2011, small businesses could suffer “liquidity” problems when trying to raise funds to pay the taxes. This can lead to the liquidation of many businesses 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.

The likelihood is that Congress will act upon this mess and in all probability will simply extend the provisions of EGTTRA for a couple more years. Of course, they could have done this in the first place and avoided the problems caused by their screwup.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Glenn “Chip” Dahlke, a Senior Contributor to The Living Trust Network, has 30 years in the investment business. He is a Registered Representative with LPL Financial and a principal with Dahlke Financial Group. He is registered to transact securities business with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY. Securities offered through LPL Financial. Member FINRA/SIPC. Contact him at chipdahlke@dahlkefinancial.com or at his office on Ashlawn Farm in Lyme, CT (860) 434-4261.