As I write this we are in the midst of the political conventions and focused on the two major party candidates, John McCain and Barack Obama. These candidates have expressed their views on estate taxes, but remember, it is the Congress that is driving the estate tax bus. As regular readers know, the federal estate tax is in a state of flux. Presently, the estate tax is scheduled to be eliminated for decedents dying in the year 2010. It returns permanently the following year, unless Congress acts, with a $1 million exemption, down from $2 million in 2008 and $3.5 million in 2009. Most prognosticators believe that Congress is unlikely to leave the estate tax system alone, but election year politics will likely keep Congress from passing any reforms until next year at the earliest.
Even though lawmakers probably won’t make any changes this year, they have begun hearing testimony and debating the issues already. Among the changes that are being considered is portability of the exemption amount to surviving spouses. Currently, if one spouse dies without fully using up his or her $2 million exemption, that amount is wasted. This can happen when the first spouse to die doesn’t own enough assets in his or her name or when he or she leaves the entire estate to the surviving spouse. Reform in this area would allow unused exemption amounts to pass to surviving spouses, thus making two exemption amounts available for use when the surviving spouse dies.
There has also been discussion of changing the estate tax to an inheritance tax. This would put the focus of the tax not on the decedent, but rather on the recipient. Each person would be given a lifetime inheritance tax exemption and would pay taxes on any amount they inherit in excess of that amount. This is the type of system used in many other countries that have death-related taxes. Such a system has interesting public policy ramifications, but may be just too radical a change for this country at this time.
It seems a certainty that there will be discussion about and very possibly changes to both the estate tax rate, the top rate will be 55% in 2011, and the exemption amount, $1 million in 2011. Even though any change in the estate tax laws must start with Congress, the positions of the two presidential candidates are worthy of note. The Tax Policy Center of the Urban Institute has put together summaries, derived from candidate statements and websites as well as input from the candidates’ campaigns, of the two candidates’ positions on many tax issues.
You can view the full analysis at www.taxpolicycenter.org/taxtopics/presidential_candidates.cfm. In summary, their positions on estate taxes are:
- Senator Obama: Permanently fix the estate tax law as it is currently for 2009: an exemption of $3.5 million and a top rate of 45 percent.
- Senator McCain: Permanently reduce the tax in 2010 by increasing the estate tax exemption from its scheduled 2009 level of $3.5 million to $5 million and reducing the tax rate from 45 to 15 percent.
Kirsten Howe practices estate planning law in Walnut Creek. Send your estate planning questions to Kirsten by e-mail.