By: Kyle C. McInnis
Shareholder - Cook, Yancey, King & Galloway

Since the inauguration of President Obama, many of you are either excited or fearful about the policy decisions of the new President. Given the many, multifaceted problems facing the country, Obama will have to act quickly in confronting his administration's challenges during his first year in office. While the economy, national security, and health care policy will dominate the political news, Obama will be forced to confront another policy of great interest to wealthy taxpayers: the federal estate tax.

As you may know, the federal estate tax is slated for elimination in 2010. This repeal, however, is limited to 2010 only. In 2011, the federal estate tax comes roaring back at levels and rates not seen since President Bush's first term. To illustrate this point, you could die at any time this year and transfer $3.5 million of assets to your legatees without paying federal estate tax. Next year, one could transfer an unlimited amount of assets at death without incurring estate tax because of the one-year repeal. If you are lucky enough to survive 2010, you are rewarded with the ability to transfer only $1 million of assets to your legatees before incurring tax at rates as high as 55%.

As you can see, this is terrible tax policy and a planning nightmare. Almost every estate planner believes that Congress will act to prevent the 2010 temporary estate tax repeal. The question then becomes: What will President Obama's reform look like?

During the presidential campaign, Mr. Obama addressed estate tax reform with a simple solution. Instead of modifying the current estate tax scheme, he proposed to freeze the applicable exclusion amount at $3.5 million and maintain the highest tax rate at 45%. Such a proposal simply maintains and extends the 2009 estate tax rules. But, Obama also added a twist to his proposal. He would allow a surviving spouse the ability to apply any unused portion of their deceased spouse's $3.5 million exclusion against the surviving spouse's estate. This idea is commonly referred to as "portability" of the applicable exclusion.

There are, of course, endless permutations of Mr. Obama's plan. Congress could attempt to address all sorts of estate planning techniques, such as family limited partnerships or LLCs, dynastic trusts, or lifetime gift transfers to trusts. As the President learned in the battle over the stimulus bill, the legislative process is messy and he may not be able to get an estate tax reform bill that resembles his campaign pledge. No one quite knows what a final bill will look like, but most planners are preparing for an extension of the current $3.5 million applicable exclusion amount and 45% tax rate. If you would like to discuss how these estate tax reforms might affect you or your existing estate plan, Cook Yancey attorneys are available to assist you. The firm has experience and expertise in a diverse array of personal and business advisory services, from basic business and estate tax planning to sophisticated techniques used to minimize, defer or eliminate estate tax liabilities.

Taxation, Estate Planning & Business Formation Attorneys

William C. Kalmbach
Kyle C. McInnis