Estate Planning Under Obama

Copyright © 2008, Greenwich Financial Management Inc., a registered investment advisor.

David Letterman quipped that Barack Obama is now President, and he thinks he speaks for most Americans in saying that it’s alright if he starts the job a little early.

One economic item that President-Elect Obama will take up soon is the “sunset provisions” of President Bush’s tax cuts. Under this gimmick, the Administration created large tax cuts but did not need to budget them as permanent deficit items, as they disappeared unless re-enacted by Congress. So, for example, the legislation ended the federal estate tax in 2010 only to bring it back in its prior form in 2011.

Here are the specifics under current law: For tax year 2008, under the federal Unified Estate and Gift Tax, up to $2 million is excluded from a person’s estate (minus amounts used up during that person’s lifetime, for example, by gifts); this excluded amount is scheduled to increase in future years up to $3,500,000 in 2009. The maximum marginal estate tax is 45%. The estate (but not gift) tax is slated to cease in 2010, then returns to a $1,000,000 exclusion and maximum 55% rate in 2011. Some quipped that it had become part of sound tax planning to die in 2010.

The idea of an estate tax is based on ideas going back to the founding of our country. Thomas Jefferson among others believed that the development of great hereditary fortunes would threaten our republican form of government. The first estate tax, imposed in 1797, supported naval construction during the Revolutionary War; it was repealed in 1802.

In modern U.S. politics, Republicans often portray the estate tax as confiscatory. Democrats are apt to see the estate tax as equitable and providing a tax incentive for charitable giving. The political parties thus express certain elements of the conflict between social classes. However, billionaires Bill Gates and Warren Buffett—perhaps practicing noblesse oblige--have opposed elimination of the estate tax.

The Democrats have won the national election. As to the estate tax regime, we will probably take a middle route. Most likely, Congress will enact legislation to raise the “lifetime exclusion” on estate tax to $3.5 million, the stipulated 2009 level, on a permanent basis. (A useful but unlikely change would be to index this amount to future changes in inflation.) Congress may also vote to raise the annual gift exclusion, perhaps to $15,000. These changes will make it possible for most moderately well to do families to avoid the need for serious estate planning, while cementing that need for decedents likely to have a net worth at death substantially greater than $3.5 million. Such wealthy individuals and families will need to make traditional estate planning decisions, including the potential use of trusts, family limited partnerships, private foundations and life insurance.

[This article is not written by a tax expert and does not present the kind of customized tax advice available from a qualified tax attorney or accountant; however, the author is glad to discuss PPLI as an investment product with your tax advisor.]

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.

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