Ashley Flotte’s Legal Blog

As previously discussed, the media as well as the estate planning community continue to monitor the presidential candidates’ views on the fate of the federal estate tax. Another interesting article on the topic appeared on October 23^rd by Floyd Norris of The New York Times. The following is an interesting excerpt from that piece:

“The shape of [the estate tax], and its ability to raise significant sums from the very wealthy, will be decided by Congress next year and is an issue in the current presidential campaign. Senator John McCain and Senator Barack Obama agree that the tax should be extended, but differ significantly on the details.

Mr. McCain would exempt far more estates from the tax and would slash the tax bill for those who still must pay. Mr. Obama proposes to basically extend the tax as it will be in 2009.

The issue concerns more than dollars, although the dollars are substantial. A new study by the Tax Policy Center estimates that the estate tax backed by Senator Obama would bring in $116 billion from 2010 to 2014, while the McCain plan would bring in $27 billion.

To those who support an estate tax that bites the very rich, it is an issue of sharing the burdens of a free society by imposing a progressive tax that brings in money from those who have most benefited from the society. It encourages charitable giving, because such donations are one way to avoid or reduce the estate tax.

The tax also encourages work, they argue, by limiting the creation of an idle rich class that became wealthy by inheriting cash, not earning it. As Andrew Carnegie put it, “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.”

To opponents, the estate tax smacks of double taxation, as money that was taxed when it was earned is taxed again at death. They say it discourages work, saving and entrepreneurship.

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If Congress takes no action in 2009, the estate tax will fall to zero in 2010, and then bounce back to 2001 levels in 2011. That would create what the Tax Policy Center report, written by Leonard E. Burman, Katherine Lim and Jeffrey Rohaly, delicately calls “grotesque tax planning initiatives.” What they mean is that there would be a great temptation to do in dear old (very rich) dad before midnight on Dec. 31, 2010.

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The Obama plan calls for keeping the exclusion at $3.5 million permanently, as well as for maintaining the 45 percent tax rate.

The McCain plan seeks to raise the exemption to $5 million. But the far more important part of his proposal is to slash the tax rate to 15 percent. For those with estates in the range of hundreds of millions, that would have the effect of cutting the tax burden by two-thirds.

In 2001, the exclusion was $675,000 and the tax rate 55 percent. If nothing is done, the tax rate will revert to that level and the exclusion will fall to $1 million.

One sign of the accomplishments of the opponents of the estate tax is that while Mr. Obama wants to return tax rates on very high-income Americans to the levels that prevailed before President Bush took office, Mr. Obama supports an estate tax rate that is 10 percentage points lower than it was then.

There are many other parts of the tax law that must be changed next year. Congress used to pass tax laws for individuals that purported to be permanent, but since 2001 that practice has died. Leslie B. Samuels, a partner at Cleary Gottlieb and former tax policy official in the Clinton administration, notes that such provisions as a temporary fix for the alternative minimum tax and one allowing deductions for tuition expenses for some parents will also expire at the end of 2009. Individual income tax rates will rise at the end of 2010.

None of this will be easy. Instead of forecasted surpluses, the outlook is for huge deficits even before considering the tax cuts each candidate has proposed, not to mention the inevitable stimulus package to deal with the worsening recession.

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