Future Of Estate Tax Becoming Clear

President-elect Barack Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010. . . . 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.

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%.

From here, quoting the Wall Street Journal.

Under existing law driven by budget balance rules in Congress, the estate tax, but not the gift tax, is repealed in 2010 and is replaced by a provision that would carry over untaxed capital gains when property is received by heirs. Then, in 2011, the estate tax is reinstated with a $1 million exemption per person, and a top tax rate of 55% (plus a 5% bubble rate to recapture the benefits of law marginal rates on top of the 55%). The 2011 tax rates and exemptions would constitute a major estate tax increase from 2009 levels.

Uncertainty over the future of the estate tax has made it hard for taxpayers to engage in sensible long term estate planning.

At least one version of the proposed 2009 estate tax bill would also eliminate the need to create trusts at the death of the first spouse to die, in order to prevent the exemptions available to that spouse from being wasted, one of the first elements of almost every estate tax reduction plan. No one expects the carry over basis for capital gains provisions to be included in the estate tax preservation bill.

An increase in the amount that can pass free of estate taxes from the $600,000 per lifetime per person, when I started my trusts and estate practice about twelve years ago, to the $7,000,000 per married couple likely to be adopted this year, does not abolish the estate tax. But, it does reduce the pool of people for whom serious estate tax planning is necessary by something on the order of 95%.

Federal estate tax planning will be restored to its status as a specialty relevant only to the most affluent clients, instead of one relevant to almost all members of the upper middle class. The rest of the estate planning bar will have to refocus, as it has already, on planning for blended families, for business succession, for heirs who need to receive their inheritances in the form on protective trusts, for asset protection, to preserve Medicaid eligibility, and on planning to minimize income taxes, state inheritance taxes and administrative costs at death.

The reduced number of people impacted by estate taxation, and increased size of the Democratic party majority in Congress, may also eventually make legislation to close loopholes in the estate tax base politically viable. Current loopholes include asset valuation rules that allow donees and heirs receiving ownership interests in closely held businesses to receive large discounts from the fair market value they would have for tax purposes if valued at a pro-rata basis relative to the value of the business as a whole, for their minority interests in the enterprise.

Tax laws that close loopholes in the tax base tend to be less politically visible than those that can tax rates or exemption amounts, and would likely appear as revenue raising offsets in bills that focus on more easily understood tax cuts.