Obama and GOP Agree on Estate Tax: Winners and Losers

December 7, 2010
300px Official portrait of Barack Obama Obama and GOP Agree on Estate Tax:  Winners and Losers

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Last night, President Obama and leading Republicans came to an agreement to reinstate the estate tax in 2011 and 2012. The agreement exempts an individual’s first $5 million from the tax, and above that amount, the rate maximizes at 35%.

However, this is not a done deal. The agreement must still pass through both houses of Congress, and most Democrat leaders are quite upset with Obama’s concessions. Obama has stated that he gave in because the deal avoids an increase in income taxes for most Americans starting on January 1 during these hard economic times.

After most predicted as late as last week that Congress would not even touch estate taxes until the New Year, the light seems to be at the end of the tunnel. So since we’re late in the 4th quarter, in the bottom of the 9th, 2-minute warning, or whatever apt sports analogy you like, it might be interesting to discuss who is winning, who is losing, and what is undetermined in the estate tax game.

WINNERS

Republicans

While the estate tax is not being eliminated, the GOP is really getting their desired rates in this agreement. Also, tax reforms are usually quite difficult to achieve during a “lame-duck” Congress, but Republicans look like they’ll “win” while maintaining the rhetoric that the Democrats’ opposition would cause increased income taxes for all.

About 99.9% of Estates

Without any action by Congress, only the first $1 million of an individual’s estate would have avoided the estate tax beginning on January 1. However, now somewhere in the vicinity of 999 out of every 1,000 Americans will be unaffected directly by the tax.

Farmers

Most farms are family-owned businesses. When a key family member dies, many families are forced to sell off at least some portion of their farm to pay the tax. This new exemption makes great strides to relieve this burden for many.

The Terminally Ill

Terrible stories have come out in the last couple of months about how some people have refused life support in hopes that they will die before the estate tax is restored, thereby saving their families hundreds of thousands of dollars in taxes. The new exemption and rate will hopefully reduce or eliminate this horrific practice.

LOSERS

President Obama

While he is trying to protect income tax rates, this agreement breaks his campaign promise to let EGGTRA rates expire and has angered many Democrats.

Democrats

While the new rates are temporary, the bad news for Democrats is that to get taxes back to levels that they prefer, they would be in the unenviable position of having to raise them in 2012, a Presidential election year.

Those Without Wills (and Estate Planning Lawyers)

There is a prevalent myth that only the wealthy need estate planning services. Many people will see the new $5 million exemption level and be even less inclined to get a will.

UNRESOLVED

  • Will the compromise garner enough support to gain the required votes in Congress?
  • Will the “step-up in basis” still apply at the decedent’s death? Example: John buys ABC stock for $1 million. On the day John dies, ABC is worth $5 million, and John leaves it to Mary. With a step-up in basis, Mary’s basis in ABC becomes $5 million. Without it, Mary would owe tax on the $4 million gain.
  • Will the estate tax exemption be “portable”? Example: Fred dies and only uses $1 million of his $5 million exemption. If the estate tax exemption is portable, when Fred’s wife Mildred dies later, her estate would get a $9 million exemption (the total of her own $5 million plus Fred’s unused $4 million).
  • How does one plan for 2013 and beyond?
 Obama and GOP Agree on Estate Tax:  Winners and Losers
 Obama and GOP Agree on Estate Tax:  Winners and Losers

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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10 Responses to Obama and GOP Agree on Estate Tax: Winners and Losers

  1. December 7, 2010 at 12:45 pm

    Great post excellent job of laying out the “winners and losers.” It sounds like the step-up in basis issue is still a key unresolved point.
    Roger Wohlner recently posted..The Deficit Commission and Your Retirement

    • Scott
      December 7, 2010 at 1:39 pm

      Roger–

      It looks like at least Senate Finance Committee Chairman Max Baucus (D-Mont.) tried to keep the step-up (and also included portability) in his “Middle Class Tax Cut Act of 2010″ this past weekend. Since the Obama-GOP deal ended up with a greater exemption and lower maximum tax, obviously something will need to be compromised away before clear passage.

      Thanks for your quick comment!

      • December 8, 2010 at 3:12 pm

        The step-up issue doesn’t get a lot of press, but as you know it can be huge for some estates.
        Roger Wohlner recently posted..Vanguard and the Power of Twitter

        • Scott
          December 8, 2010 at 11:41 pm

          I would guess that this will be one of the compromise points over the next few weeks.

  2. December 9, 2010 at 12:06 pm

    The biggest question is what will happen with stepped up basis, this could cause many families to pay more in taxes than with a lower federal estate tax exemption

    David Goldman, Apple Law Firm PLLC, Jacksonville, FL 32217

    http://www.JacksonvilleLawyer.pro/
    http://www.GunTrustLawyer.com/
    http://www.FloridaEstatePlanningLawyerBlog.com/
    http://www.FloridaForeclosureDefenseLawyersBlog.com/
    Florida Estate Planning Lawyer, David Goldman recently posted..Removal of Florida Guardian may be in the Best Interest of the Ward

    • Scott
      December 9, 2010 at 2:24 pm

      Mr. Goldman–

      I very much agree with you. If the $1.3 million limit (plus $3 million for spouses) that is currently in place remains, this will certainly wreak some havoc on what has typically been recommended by estate planners over the last decade.

      Thank you very much for posting here!

      Note: I only know Mr. Goldman by reputation. He is one of the top legal bloggers in the country, and a fine estate planning attorney out of Jacksonville, FL.

  3. Jill
    December 9, 2010 at 1:37 pm

    What about the American people losing out on the tax revenue?

    • Scott
      December 9, 2010 at 2:35 pm

      Jill–

      Because the agreement has not yet been signed into law and because the agreement is only for two years, I think that the negotiations in the next several weeks will result in some of our lost revenue being replaced.

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