Taxation & Estate Planning

Estate Taxes: Obama vs McCain

By Michael D. Bonasera, Esq.

From today’s WSJ and the Tax Prof Blog comes this comparison of the estate tax schemes under the two leading Presidential candidates:

They agree on more than you might think:

Raising the Individual Exemption:

For 2008, the basic federal estate-tax exemption is $2 million per person, and the top estate-tax rate is 45%. Next year, the exemption is scheduled to jump to $3.5 million, the largest one-year increase in history. For heirs of wealthy individuals who die after Dec. 31, the tax savings could be enormous.

In 2010, the estate tax is supposed to disappear completely — but most tax advisers think Congress won’t allow that to happen. Starting in 2011, the tax is set to spring back to life with an exemption of only $1 million and a top tax rate on the largest estates of 55%.

Sen. McCain proposes raising the exemption “as soon as possible” to $5 million and cutting the top tax rate to only 15%, says Douglas Holtz-Eakin, senior policy adviser. Sen. Obama wants to keep the exemption at $3.5 million and the top rate at 45%.

Portability. 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.

Portability:

Both candidates agree on changing the law to make the federal estate-tax exemption “portable,” senior advisers say. This issue is known as portability because the exemption per person — $2 million this year and $3.5 million next year — would become transferable from one spouse to the other, in effect doubling the surviving spouse’s exemption. In essence, that means that spouses would be able to use each other’s estate-tax exemption without first having to set up complex and costly trusts and take other steps that many people now feel obliged to do.

Valuations:

This is a key issue when calculating capital-gains taxes on the sale of inherited assets. Here’s an example: Suppose your cousin dies and leaves you stock he originally purchased decades ago for $100,000 and the value of that stock has grown to $500,000 as of the date of his death. Your tax basis typically would be $500,000 — or, under certain circumstances, the value six months after the date of death. That means you don’t have to figure out what your cousin originally paid for that stock. This system is scheduled to continue through next year and undergo major changes in 2010. Critics say those changes would create additional complexity and impose unfair recordkeeping burdens on taxpayers. Advisers to both candidates have said the candidates want to retain the current system.

For obvious reasons I’ll be watching where this goes after the election.

Full post as published by The Ohio Trust & Estate Blog on October 15, 2008 (boomark / email).