Taxation & Estate Planning

WSJ: Obama Plans to Keep Estate Tax

By Juan C. Antúnez

Win, lose or draw, I think all sides can agree that finality on the estate-tax front would be a welcomed development. And the wait may be coming to an end. The WSJ reported today in Obama Plans to Keep Estate Tax that the new administration has concluded "that if they don't act now, it will be politically harder to go ahead with their plan to resurrect the estate tax once it has disappeared [in 2010]."  Stay tuned for an announcement "within weeks":

The Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month, congressional tax writers said.

So what can we expect? Here's what the WSJ is predicting:

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%.

Portability

Nothing surprising here, but expect "portability" of the estate-tax marital deduction to also be part of the plan. I predict this change in the law will ultimately end up having the most profound impact on your average estate planner's day-to-day practice. "AB" trusts, long the center of most estate plans for married couples, may soon become a thing of the past. As reported by the WSJ in October of 2008 in On Death and Taxes ... and the Candidates, both candidates were including portability as part of their estate-tax reform proposals:

Both candidates agree the exemption amount should be easily portable. "Families should not be required to undertake complex and unnecessary financial planning or be penalized for failing to take advantage of sophisticated financial strategies," says Jason Furman, economic policy director for the Obama campaign. The Democrats' nominee "believes we should eliminate the estate tax for 99.7% of families -- and this is part of his plan to accomplish that goal," says Mr. Furman.

.  .  .  .  .

Under current law this year, a married couple could leave a total of $4 million to their children without federal estate tax. "But because the exemptions aren't portable, quite a bit of planning is necessary to achieve this result," says John M. Olivieri, a tax partner at the law firm of White & Case LLP in New York City.

Suppose a husband and wife each has $2 million. The husband dies and leaves everything to his wife. Although there's no federal estate tax because of the marital exemption, the wife now has a $4 million estate but only a $2 million exemption, Mr. Olivieri says. Consequently, if she dies this year and leaves her $4 million to her children, "her estate will be hit with a federal estate tax of about $900,000," based on this year's rate structure, Mr. Olivieri says. "A similar problem arises if the entire $4 million is owned by the husband and the wife dies first."

To avoid the problem, "many married couples expend considerable time, effort, and money to avoid wasting their combined federal exemptions," says Mr. Olivieri. "But if the exemptions were portable, none of this would be necessary." However, even if the exemption does become portable for federal estate-tax purposes, Mr. Olivieri points out that many people may need to take special estate-planning steps anyway because of state-tax issues.

Full post as published by Florida Probate Litigation Blog on January 12, 2009 (boomark / email).