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Estate Tax Reforms are in the works
Estate tax reform is a year or so away, but the outlines of a bill are clearer because both presidential candidates believe that the estate tax shouldn't be; a position also favored by Democratic leaders in Congress. The main points to be negotiated are the top tax rate and the exemption amount. That makes estate planning much easier between now and when Congress takes action.
McCain and Obama share common ground on setting the parameters of the estate tax.
Both oppose keep current law. The tax is set to end in 2010 but return in 2011 with a $1 million exemption and a 55% maximum rate. Contrast that with the $3.5 million exemption and the 45% top rate for 2009.
They're close on the exemption. Obama prefers it at $3.5 million. McCain at $5 million. The top estate tax rate is their key difference. McCain favors a maximum rate of 15% while Obama would set it at 45%. Figure on a rate closer to 45% since the Democrats will run Congress in 2009.
Both candidates support making the exemption amount portable. This would greatly simplify estate planning for surviving spouses by eliminating the need for spouses to put trusts in their wills solely to save estate taxes. And couples wouldn't have to retitle assets to equalize their estates. When one spouse dies, the unused exemption would pass to the survivor and be available for use when that spouse dies.
In effect, Obama would provide a $7 million exclusion for a couple and McCain would make it $10 million. Nowadays, if one spouse dies without using up his or her exemption the remainder is wasted.
Once the main points are settled a few other issues will remain to be resolved by lawmakers before an estate tax reform bill is enacted.
Estate taxes paid to states - the stats are pushing Congress to convert the deduction under current law back to a credit, which existed prior to 2005, but the revenue loss will keep that change from being made.
The gift tax - the lifetime gift tax exemption is $1 million now, which is significantly lower than the estate tax exemption. Taxwriters are considering reinstating and integrated gift and estate tax exemption, which would allow larger lifetime gifts to be made free of gift taxes.
And carryover basis - lawmakers will act to prevent heirs from having to use the decedent's income tax basis for inherited assets. Those rules are scheduled to take effect for heirs of taxpayers who die in 2010. Taxwriters will keep the current rules allowing the tax basis for inherited assets to be their value on the date that the owner dies. Moving to carryover basis would create an estate tax planning nightmare.
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