Most Americans don’t mind paying their fair share of taxes, but they really don’t want to pay them twice. This is one of the problems that people have with the estate tax.
Your legacy was accumulated with resources that you had left over after you paid income and payroll or self-employment taxes all of your life. In addition, people pay sales tax, property tax, capital gains tax, and a number of others that are less obvious. So why should the event of your death trigger a harsh federal levy after you have already paid more than your fair share of taxes?
In addition to this, when you look at the ever-changing rate of the tax and the way the exclusion is constantly moving around the estate tax is kind of like a gamble, and a high-stakes one at that. Right now the estate tax exclusion is $5 million and the rate of the tax is 35%, and this will be in effect through the end of next year. But as the laws stand as of this writing, the estate tax exclusion will be reduced to $1 million and the rate of the tax will rise to 55% at the beginning of 2013.
So if your neighbor was pass to away on New Year’s Eve in 2012 with a $5 million estate his or her heirs would not be exposed to any estate tax at all. The entire legacy would pass tax-free.
But if you were to pass away just after midnight when the ball had dropped on Times Square and the New Year had arrived with the same amount of assets, $4 million of that $5 million legacy would be taxed at 55% so your loved ones would be faced with $2.2 million tax bill. But if you had passed away back in 2009 when the estate tax rate was 45% and the exclusion was $3.5 million, that tax bill would’ve been $675,000.
Many would suggest that this is kind of like a lottery, a game of chance, and it simply isn’t fair, and it would be hard to argue with anyone who feels this way. But we have to deal with reality as it exists, and the fact that things are always changing is one of the reasons why you would do well to consult with your estate planning attorney a regular basis.