Now that Barrack Obama has been elected President of the United States and the Democrats in the Senate are close to having the 60 votes it needs to close off any attempt at a filibuster, what might we expect in 2009? If we assume the campaign rhetoric to be anywhere close to reality there are a few projections we can now make.
1. Highly likely. The all important estate tax exclusion is to increase under current law to $3,500,000 for decedents dying in 2009. President-elect Obama has said he supports an extension of this amount and no more beyond 2009. It would not be far fetched to expect Congress to act on the extension of this amount in 2009.
2. Highly likely. President-elect Obama has also indicated he would like to keep the estate tax rate at 45%. This means an individual with an estate of $4,500,000 (assuming he or she does not have a spouse) would have an estate tax of $450,000 (45% of the $1,000,000 over the exclusion).
3. Probable. It is likely Congress will keep the basis adjustment of assets which pass from a decedent’s estate. Now, when a person dies owning a $100,000 assets, which cost him or her, $20,000 (their basis), the heirs receive the asset along with a new date of death basis of $100,000. This means when the heir sells the asset there is no capital gain. Had the decedent sold the asset when he or she was still living the decedent would have had to of paid the capital gains tax on the $80,000 gain.
Under current law the basis adjustment would have gone away for decedents dying in 2010 (although subject to some exclusion amounts) and instead the heirs would have had to pay tax on the gain when they sold the inherited asset just like the decedent would have. It is likely Congress will change this to avoid the 2010 carry over basis regime coming into play in 2010. This is huge from an accounting perspective.
4. Probable. Planning now for a couple with a taxable estate (an estate of over $3,500,000 starting in 2009) usually requires the creation of a trust when the first spouse dies. This trust is commonly referred to as a bypass or credit shelter trust and the assets which pass into this trust when the first spouse dies are not included in the estate of the second spouse to die and therefore pass to the heirs of the couple estate tax free. It is likely in 2009 Congress (which is supported by President-elect Obama) will allow the exclusion amount to be “portable.” This means when the first spouse dies the surviving spouse will have a $7,000,000 exclusion amount to use when he or she dies.
Portability of the exclusion will allow the assets to pass to the surviving spouse without the need to set up a bypass trust when the first spouse dies. The exclusion is portable (or transferable) from the first to die to the survivor. The surviving spouse will be able to access the entirety of the couples resources without the need to utilize a bypass trust.
Since 2001 couple clients of our office have overwhelming been using a type of estate plan which incorporates a “disclaimer” estate plan. This plan allows the surviving spouse to accept all of the assets of the first to spouse to die and disclaim only as much as is necessary to insure the surviving spouse does not have assets in his or her estate more than necessary to avoid paying an estate tax. An example, would be a couple with a $5,000,000 estate, divided equally between the husband and spouse. When the first spouse dies with a disclaimer plan in place the survivor would likely “disclaim” $1,500,000, allowing the amount to pass into the bypass trust. The surviving spouse could still use the assets in the bypass trust, but on a limited basis.
It would not be necessary under the concept of portability to create the disclaimer trust. Such an estate plan would likely still work under the concept of portability, without any need to change an existing estate plan for this reason alone.. All assets would pass to the surviving spouse who would then be able to use a $7,000,000 exclusion.
The crystal ball is still a bit murky, but it will likely clear very quickly in 2009. As details of any Democratic plan come forth we will keep you posted.
Note: This post is actually an earlier post (late in the evening of November 4, 2008) which was moved to this blog.
