As I meet with clients to discuss their estate planning, I am often asked the question, Will there be a federal estate tax after 2009? Heres what I tell them. Most planners agree that permanent estate tax repeal is dead and that we will continue to have a tax based on the present set of rules. As you probably know, the federal estate tax is nearing the final years of a ten-year phase out. In 2001 Congress enacted the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which gradually reduces the top estate tax rate (55% in 2001 and 45% in 2009) and raises the estate tax exemption ($675,000 in 2001 and $3.5 million in 2009) until the tax is repealed in 2010. The repeal is not permanent, and if the law is not renewed, the estate tax returns in 2011 with a 55% rate and a $1 million exemption.
What may be more interesting to clients (and planners) is what President-elect Barack Obama thinks about the estate tax. He does not support the repeal of the estate tax, nor does he support returning the estate tax exemption and rates to anywhere near the 2001 levels. His proposal for the future of the estate tax is to freeze the exemption and rates at their 2009 levels, that is, a top estate tax rate of 45% and a federal estate tax exemption of $3.5 million.
President-elect Obama also supports making the estate tax exemption amount portable. Under current law, if a married couple properly allocates their assets between them and creates an estate plan with appropriate trusts, they can take advantage of both of their estate tax exemptions and pass twice the individual exemption amount (a total of $7 million) to their children free of federal estate tax. A portable exemption would allow married couples to accomplish this same effect without the need for asset reallocation and detailed estate tax planning.
President-elect Obama has not proposed unifying the gift tax exemption with the estate tax exemption as a part of his vision for the future of transfer taxes. This means the gift tax exemption will likely remain at $1 million, no matter where the estate tax exemption is set.
With all the other pressing issues facing the new administration, time will tell where estate tax reform will fall on its list of priorities. However, if President-elect Obama signs into law a permanent estate tax rate and exemption before the end of 2009, whatever the details may be, most planners and their clients will welcome a set of rules that ends the uncertainty of planning under EGTRRA.