An Election Prediction – Estate Taxes

With the U.S. Presidential Election less than two months away, speculation has built on the impact on taxes with both Democrats and Republicans asserting that their plans will benefit the public best.  Generally speaking, the Obama plan focuses on the middle class described as those with incomes of $250,00 and below, recognizing the economy.  The McCain plan, also generally speaking, would further slash taxes on corporations and the upper classes.

The Alternative Minimum Tax (AMT), while unpopular both with Democrats and Republicans,will likely continue in some form with Congress each year enacting “patches” providing tax relief for many middle income taxpayers.

For at least one tax, the Federal Estate Tax, officially referenced as the federal Unified Estate and Gift Tax, I have a prediction.  I predict that the ultimate result will be the same whether a Democrat or a Republican occupies the White House.   The reasons are complicated but here is why.

In 2001 Congress passed the current law known as the Economic Growth and Tax Relief Reconciliation Act or EGTRRA with a complex system of exemptions depending on the year of death until the end of 2010.  The law is scheduled to come to an end or “sunset” on December 31, 2010 at midnight.  For reasons that I will explain, 2010, the year with no estate tax, as described in the law, will likely never come.

Since spouses have an unlimited marital deduction, estate tax problems occur, if at all, when both spouses have died and children inherit.   Married persons may currently provide either by Wills or by Living Trusts for “By Pass” or “Credit Shelter” Trusts that continue during the lifetime of the surviving spouse and then can be passed on estate tax free to heirs on the death of the second spouse.

This year the amount that is exempt from taxation even without planning is $2 million.  Next year it will be $3.5 million.

The trade off for “elimination” of the estate tax during 2010 is that, for that year only, the capital gains tax inheritance rules would be totally revised.  The revision is so extreme and so complicated that, since EGTRRA was passed in 2001 until the present, virtually everyone who works in the field has expected it to be changed.  One reason I know the impracticability of the projected 2010 “solution” is because I lived through this before.

Why the Republican Plan Will Move Away From Abolishing the Federal Estate Tax.   In 1976 as a young law student in Philadelphia I watched as   several friends of mine at Temple University School of Law who had chosen to take Estate and Fiduciary Taxation the past semester were caught in a radical change in the law known as elimination of step-up in basis at death.  The law was the Tax Reform Act of 1976.  They should not have been too concerned.  The revision, referred to in at least one source as a “nightmare” was repealed a few years later retroactively.

Step-up in basis at death is what we have now and it significantly benefits heirs.  If a parent purchases a stock, for instance, at $10 per share in 1970 and, at the time of his death in 2008, the share is worth $300 per share and then a few months later it is is sold for $330 per share, his heir pays taxes only on the difference between $300 and $330.  If step-up in basis at death is eliminated, the heir would owe taxes on the difference between $10 and $330.  EGTRRA takes this into acount by allowing a step-up of up to $1.3 million plus $3 million for assets left to a spouse.

The problem is not just accounting or the fact that, depending on relationship to the decedent, the estate might owe more taxes, but heirs will have difficulty determining the original cost or factoring in stock splits and other changes.  The same issue applies to other appreciated assets including real estate.  EGTRRA is utterly unworkable for 2010 and another solution has to be found.

Why the Democrats Will Trade Up To a Higher Number.  While Republicans cannot make the 2010 elimination of the Federal Estate Tax workable, Democrats similarly would find it difficult to turn back the clock.  Taxpayers, once conditioned to believe that $3.5 million will be exempt from tax, will expect it.  I predict that whether Obama or McCain is elected, the figure exempt from tax will be frozen at the 2009 figure of $3.5 million for a single person with a possible further exemption of $3.5 million (total $7 million) for married couples and a 45% rate.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

follow me on:

Leave a Comment: