The news has been recently packed with countless stories about: jobs, healthcare, the travesty in Haiti, an uncertain economy and terrorism. These topics have left room for only modest coverage of a pending bizarre tax scenario where a tax goes from 0% one year to 50 % the next year. We have just such a scenario lined up to occur at the end of 2010.
I was recently reading an article by Chuck Collins titled, “Stephen King Meets the Estate Tax.” His story suggests that death rates skyrocket in 2010 so that the affluent can take advantage of the last year of 0% taxes on inheritance. This wild concept is not so wild unless the Congress takes action.
In 2010, the estate tax, our nations levy on inherited wealth, is set to disappear completely only to return at 2001 levels on January 1, 2011. I predict this will be the next political football. There is $1 Trillion in revenue over the next two decades at stake to assist the government in balancing the budget. But – the congress will also be wary of harsh impacts on an economy trying to get back on its feet. Speculation abounds about what Congress and the Administration will do. One scenario even suggests that lawmakers will deal with the issue mid this year and make decisions retroactive to January 2010. Ron and I have debated on what we each think is likely. The conclusion is that the political environment is so charged, it is difficult to have a leaning toward any one potential action.
All this will represent a quandary for successful entrepreneurs. Plans for transitioning ownership of their companies to heirs may be up in the air or possibly accelerated. The tax code in dealing with primary wealth, if it is a business, is complex. Additionally there is reasonable speculation that the basic income tax code will see dramatic revision in the next year. All this may make it impossible to anticipate what you should do until the dust settles. If Congress deals with these matters at the last moment, there may not be time to properly plan and implement transitions to minimize the tax exposure to your heirs or a negative impact on your business.
I am not pleased with presenting a potential nightmare without offering some substantive recommendation for avoidance. However, there remains too much uncertainty today to recommend specific actions other than:
- Start your transition planning now and if you have a plan dust it off to validate the basics of who and how much.
- Contact your tax advisors and begin preparing scenarios based on what ifs. You may want to have as many as 3 plans in your pocket to move on when more definitive information becomes available.
- DO NOT WAIT until the last minute when this subject becomes the number one story and the entire country is repositioning for the change.
Despite the doom and gloom of much of the business news of late, many entrepreneurs have enjoyed success over the past decade(s) which now equates to wealth in their companies.
This is a good time to start thinking about how you want to distribute that wealth in the future. If you do not plan, the decision may be made for you in Washington DC.
Watch for our next blog on the “5 Common Errors in Transition Planning.”