We were nervous last year. The long-anticipated sunset provisions of George W.’s 2001 income and estate tax reform were coming into play and there was no telling how it would end up. All of us who were involved in business succession planning believed that we were facing a lose/lose predicament with the power and potential impact of the lame-duck Democratic Congress laying back and benefiting from a perfect situation which was:

• If Congress did nothing it would realize a much-coveted tax increase, those who were voted out for passing Obama-Care would not be around to take the heat, and those who were returning to Congress could absolve themselves of any responsibility by doing what they have been doing best for the last 10 years — blame it on Bush.
• Alternatively, if Congress approved a new, less confiscatory tax law, they could take credit for this positive move.

If the Democratic Congress did nothing, the income and estate tax rates would be going up and the estate tax credits would be going down. If they did anything, the details behind any promoted tax reduction would eliminate some or all of the few remaining estate planning opportunities such as valuation discounts and sales to intentionally defective trusts.

But believe it or not, they got it right! I know it may be hard for you to believe, but personally I can attest that for the first time in my 38 years as a business succession planner, I have to give Congress its props. Wonders never cease. Obama passed on the opportunity to score more revenue and BIOB (blame it on Bush). Potentially in the wake of a groundswell of fear that an increase in the income tax rate would restrain economic recovery, the estate tax impact on the closely held business was substantially improved. If you don’t believe me, just consider these major points of the new estate tax law:

• The estate tax credit has been increased to $5MM. Prior to 2010 when the estate tax rate temporarily went to zero, the estate tax credit was $3.5MM. Voices in Congress expressed that this was unreasonably supporting the rich so we were thinking the liberals would roll this credit back to $2.5MM. But “help me up from the floor”, they increased it to $5MM! This means a husband and wife can pass a $10MM business to their successors with no estate tax. A secondary benefit is that you can hold on to $10MM of assets for your security without the fear that you are creating otherwise avoidable estate tax. When you consider the leverage of valuation discounts, a husband and wife can more practically hold on to and pass a $15MM estate to their children with zero estate tax.
• The titling challenge associated with estate tax credits was solved. Prior to 2010, in order for you and your spouse to utilize estate tax credits, you had to have property titled in each of your individual names. Joint titling, which is so common to the marital union could cost $2MM or more in unnecessary estate taxes. Transferring title of assets to spouses put fear in the hearts of control freaks and the marital insecure. This titling conundrum increased probate expenses and demanded expensive legal fees to make sure both spouses had adequate property titled in their individual names. Can you believe it, Congress also alleviated the necessity to chase property titling? Congress now allows any unused estate tax exemption of the deceased spouse to be utilized in the surviving spouse’s estate. You can now burn your brain energy on playing offense versus defending your estate from embedded titling traps designed to extract more estate tax from the uninformed or those unwilling to play the retitling game.
• The lifetime gift tax credit has been increased to $5MM. Previously, the lifetime gift tax credit was frozen at $1MM while the estate tax credit was allowed to climb to $3.5MM. Loud voices in Congress proclaimed that gifting above the $1MM lifetime gift tax credit provided the wealthy with too much opportunity to move estate assets out of harm’s way. Therefore, we were assuming that the gift tax credit was not going to change. “Get me a cold compress!” Congress equalized the gift tax credit at $5MM! Congress has effectively told business owners to take their best shot at the gifting game. As a result, through the use of these credits and valuation discounts you can pass about $15MM of your business during lifetime and avoid estate tax on almost 50% more growth in the value of your assets.
• The estate and gift tax rate has been capped at 35%. Prior to 2010 the tax rate was 45%. Since when have you seen a Democratic, lame-duck Congress reduce taxes? I figured the odds for the return of the Nash Rambler were greater than Congress reducing the estate rate. But it happened and now your children can plan on saving $100,000 on every $1MM worth of tarmac, buildings, lifts, lighting and inventory you are able to pass to them. Did Congress hear the “get out of our pockets” message of the November elections, or what?

So allow me to affirm that at least in part, the dedicated optimist has been validated, a lame-duck Democratic Congress got it right.  However, before you begin to think that Obama has renounced the redistribution of (your) wealth let me clarify that this window of conservatism and support for the small business owner will only be open for two years. Just as Bush passed the buck in 2001 by stipulating that the tax cuts would “sunset” in ten years, this estate tax relief is only secure for two years. Prior to December 17, 2012 another lame-duck Congress will have to affirm or restate both the income and the estate tax rates. Consequently, you should develop a personal strategy regarding two important considerations. First, you should consider the probability that the next Congress will not be as generous as the last. In the event you lack optimism, you should further consider utilizing your $5MM ($10MM joint) gift tax credits before Congress takes them back. Second and more important, you should recognize that taxation will be the core issue of the next election. The essence of what we consider to be the “Bush tax cuts” call for the current estate (and income) tax rates to be affirmed as permanent law or readdressed top to bottom. Therefore, you should be prepared to support political candidates who agree with your position on taxation. Put your money where your heart is or be prepared to see your money fund an “Obamanation”.