And so the battle of the Bush era tax cuts begins in earnest. We have all been waiting for the first salvo, and the statements by President Obama regarding a short term extension of the Bush era tax cuts are undoubtedly only the beginning. The question, just like 2010, is when we will actually see some clarity around the issue.

Unfortunately for those of us who work in the estate planning field, most of the focus is on income taxes. That leaves us where we have been for the past two years: waiting for the other shoe to drop. While I don't claim to have any brilliant insight, I am watching one aspect of the debate very carefully: the line in the sand being drawn at the $250,000 of income level. I have long been of the opinion that trying to pass any extensions of tax breaks for the wealthiest of Americans would be problematic for anyone seeking reelection, and one could easily interpret this income limit as the first evidence of that trend.

So just how significant are the changes we have in store without any new legislation? I had the occasion recently to discuss a case with a producer and a number of attorneys regarding a closely held business with a great problem: excess retained earnings. While most of us would welcome the issue, or certainly prefer it versus the opposite, it does pose an interesting question. Perhaps even multiple questions, starting with what impact the expiration of the Bush era cuts could have on the decision making process about a seven figure retained earnings problem? How about the tax bill nearly tripling on the distribution? A significant problem to say the least and devastating if it catches the client by surprise.

How do we get to that more than double increase? Here's the math:

• Current dividend tax rate - 15%
• Dividend tax rate if/when the tax cuts expire - 39.6%
• Additional Medicare tax on investment income for top earners beginning in 2013 - 3.8%
• Total tax - 43.4%!

Obviously it is critical in this case, as well as others I am sure, to make some smart decisions before the end of the year. What if, however, even the 15% is more than we want to pay? Are there any other options? Once again, the current environment provides us with some opportunities not only in 2012, but also if the Bush era tax cuts expire, assuming that interest rates stay low in 2013. A loan from the company to the owner with rates locked in at historically low AFR rates could allow the owner to have use of the funds without the corresponding tax bill. Further, depending on the age of the client, a split dollar arrangement could also work. Either one of these approaches would also have a significant benefit for us in the life insurance profession: a ready supply of premium dollars to use for any number of planning strategies.

So as our clients facing a potentially monstrous increase in their tax bill at the end of the year, it makes sense for us to consider strategies that will work even if that phone call from the Governor's office in the form of an extension of the cuts never comes. As always, if you want to explore these last two items feel free to give me a call.