The Fiscal Cliff and Your Estate Planning (Part III): The Impact on You

November 30, 2012
300px U.S pennies The Fiscal Cliff and Your Estate Planning (Part III): The Impact on You

The fiscal cliff vs. estate & gift taxes — penny wise and dollar foolish? (Photo credit: Wikipedia)

In the first post of this series, we discussed the fiscal cliff and its impact on our economy.  In the previous post, we covered the proposals most likely to be considered by Congress in the coming weeks.  In this final post of the series, we cover the impact of these proposals on you and the surprisingly small effect they have on the fiscal cliff problem in general.

Does Any of This Directly Apply to Me?

So how does any of this apply to your own situation?  Here’s a quick back-of-the-envelope type of calculation to help you figure this out.

  • Step One:  Calculate and total the approximate value of your current assets.  Repeat for your spouse if you are married.  Include the following:
    • Real Estate
    • Bank and Investment Accounts
    • Retirement Plans
    • Vehicles, Furniture, Personal Property
    • Business Interests
    • Money Owed to you
    • Other Assets
  • Step Two:  Calculate the value of your debts.
  • Step Three:  Total Assets minus Total Debts = your Net Worth.
  • Step Four:  Add to your Net Worth the face value of any life insurance owned by you and/or your spouse, regardless of beneficiary.  As stated in this post and at 26 U.S. § 2031, the U.S. Tax Code includes this and other unowned property in its definition of your “estate”.
  • Step Five:  Think about any inheritance you anticipate in the future.  Whether or not you wish to add this to your total or not, this is a very good time to consider the effect of any new law on your parents, grandparents, etc.

As of now, the magic number is $1 million.  If your total approaches amount or more, then you’ll need to pay close attention to what Congress does to estate and gift taxes in the near future.  However, as we’ll see below, it is probably more likely that a lifetime exemption of $3.5 million or higher will eventually pass in Congress.

What Would be the Impact On the Fiscal Cliff Problem?

The Urban and Brookings Tax Policy Institute recently produced a report estimating the financial impact of the various estate tax proposals on the economy in general. The following facts are extrapolated from the Tax Policy Institute report, which reveals some interesting data:

  • Of the projected 2,611,000 U.S. deaths in 2012, just 3,300 of them will owe any estate tax, resulting in approximately $12.0 billion of revenue for the U.S.  Here are the estimates for 2013 under each legislative proposal (click here for a summary of each):
    • $1.0 Million / 55% Max Rate – 52,500 estates producing $40.5 billion of tax revenue.
    • $3.5 Million / 45% Max Rate – 7,000 estates producing $21.3 billion.
    • $5.0 Million / 35% Max Rate – 4,000 estates producing $13.5 billion.
    • Estate Tax Repealed – none.
  • The following estimates the totals for the following eight years (2014-2021):
    • $1.0 Million / 55% Max Rate – 631,400 estates producing $510.1 billion of tax revenue.
    • $3.5 Million / 45% Max Rate – 78,800 estates producing $201.5 billion.
    • $5.0 Million / 35% Max Rate – 45,600 estates producing $124.8 billion.
    • Estate Tax Repealed – none.

Remember that during fiscal year 2012, the U.S. spent $3.796 trillion while only earning $2.469 trillion in tax revenues, resulting in a $1.327 trillion budget deficit.  As of November 23, 2012, the overall debt held by the public was $11.47 trillion, up $20 billion from one week earlier (cited here in part I of this series of posts).

Of all the estate and gift tax proposals cited above, the one producing the highest amount of revenue in 2013, would create $40.5 billion of revenue, or a $28.5 billion increase from 2012.  However, this proposal is part of the fiscal cliff problem in the first place.  President Obama’s preferred proposal would create $21.3 billion in 2013, or a $9.3 billion increase from 2012.

In other words, if President Obama’s proposal wins out, new revenue from estate taxes would only offset a little more than 3 days of the annual budget deficit.  Putting it another way, for every $100 of public debt, estate tax revenues would pay back a whopping total of $1.94 over the next nine years.

Pocket change.

This conflict over pennies has lasted for well over a decade now.  Sure, no one is claiming that changes in the estate and gift taxes will resolve the prospect of the fiscal cliff.  However, asking families to sit on the edge of their seats for clarity through 12 changes in 13 years is too much to ask.

The battle seems to be a series of flashy attempts by both major parties to convince the lower and middle classes that the wealthiest are taking one for the team.  In actuality, all this debate, emotion and time has been spent on an issue that has about as much effect on resolving the fiscal cliff problem as shooting spitballs at a battleship.

 The Fiscal Cliff and Your Estate Planning (Part III): The Impact on You
 The Fiscal Cliff and Your Estate Planning (Part III): The Impact on You


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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