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Estate Taxes And The Obama Administration

Income tax hikes during a recession are risky, and the new Barack Obama administration now seems inclined to postpone raising taxes on the earnings of the wealthy. Rather than chance hindering economic recovery, the Democrats who control the White House and Congress may simply let the Bush income tax cuts expire after 2010. But that approach isn’t likely to extend to the federal estate tax. Even its temporary elimination in 2010 probably won’t happen, and though the size and shape of future levies on inheritances remain uncertain, some experts expect a permanent tax with an equal or lower exemption level and equal or higher rates than those in effect for 2009.

In January, as the new Congress debated details of a massive economic stimulus plan, the Senate Finance Committee was mulling ideas for heading off the 2010 estate tax repeal, and President Obama was expected to include a plan for the tax in his administration’s first budget proposal.

During the presidential campaign, Obama had suggested he was open to freezing the estate tax at 2009 levels. Estates of people who die this year will be able to exclude up to $3.5 million from federal estate tax, and estates that exceed that ceiling will be taxed at a top rate of 45%. Those figures are the culmination of a process that began in 2001, when Congress created a plan to eliminate the estate tax by 2010. But that law expires at the end of 2010, with the exemption scheduled to drop all the way to $1 million and the top tax rate to rise to 55% in 2011.

After 2001, the Bush administration and Republicans in Congress tried several times to push through permanent estate tax reform. But two competing agendas hindered those efforts. Owners of family farms and small businesses were focused on the size of the estate tax exemption, urging that it rise as high as $10 million, thus sparing all but a handful of farms and businesses from estate tax liability. Arrayed against those interests were the nation’s wealthiest families; resigned to paying some tax—because the amounts they transferred to the next generation would inevitably exceed virtually any exemption level—they wanted a tax rate as low as the 15% that currently applies to long-term capital gains. A compromise proposal from Republican Senator Jon Kyl of Arizona, which called for an exemption of $5 million and a tax rate of 35%, drew 50 votes in the Senate in 2008 but failed to make it into law.

Unlike an income tax hike, which could lead to job losses and reduced economic activity, a new estate tax law should have little effect on the economy, particularly if it keeps 2009’s relatively generous $3.5 million individual exemption, which is 75% higher than the $2 million exemption in effect in 2008. Moreover, the estate tax, even at lower exemption levels, affects a very small segment of the population. According to Citizens For Tax Justice, an advocacy group, only 18,431 of the 2.4 million Americans (0.8%) who died in 2004 left behind any estate tax liability. And that was when the exemption amount was $2 million less than it is today.

Against that backdrop, the Obama administration apparently sees few economic or political risks in seeking an estate tax law that would forgo the one-year repeal scheduled for 2010. And some estate planning experts believe that an administration and Congress overwhelmed by red ink could push for estate tax rules less generous than those in place in 2009. Attorney Gideon Rothschild of Moses & Singer, LLP, can imagine a new estate law that would affect significantly more taxpayers than are subject to current rules. And according to Rothschild, Washington insiders are also looking at other possible estate planning changes. These include:

• The elimination of qualified personal residence trusts (QPRTs) as a tool for avoiding estate taxes on the value of a family home.

• Changing the rules for grantor retained annuity trusts (GRATs), used to reduce gift and estate taxes on property transferred to trust beneficiaries, so that gift tax will be owed on at least 10% of the value of the transferred assets.

• Outlawing valuation discounts associated with family limited partnerships (FLPs) except when the partnership involves an active business.

• Portability of the exemption between spouses which would allow a surviving spouse’s estate to apply any unused exemption of the predeceased spouse.

With change on the way for federal estate tax laws, this is a good time to revisit your own estate plan. Estate legislation could pass this year, and as Rothschild points out, there’s nothing to stop a new law from being made retroactive for 2009. We can work with you and your attorney to make sure your financial and estate plans are prepared for whatever comes.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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