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Estate Planning in the Age of Obama: Where Is Tax Law Headed?

The unexpectedly decisive re-election of President Obama, and the apparent stability of his electoral coalition, confronts estate planners with a new political reality. Here are my thoughts on where tax law is likely to go.

After a campaign lasting two years and costing an estimated $2.5 billion ($5.8 billion if Congressional races are considered), only two states (Indiana and North Carolina) switched their allegiance from Obama in 2008 to Romney in 2012. Democrats also gained two seats in the Senate. As a consequence, it is now unlikely that tax law will become more friendly to high-income taxpayers.

Big changes are scheduled to happen on January 1, 2013: the estate and gift tax applicable exclusion amount would revert to $1 million; the 15 percent maximum tax rate on long-term capital gains would revert to 20 percent; the maximum tax rate of 35 percent would revert to 39.6 percent; and qualified dividends would be taxed at ordinary income rates. Of course, none or only some of this may actually occur.

Despite considerable uncertainty, it is possible to make the following educated guesses about the likely direction of the tax law for estate planners:

  • The transfer tax regime will almost certainly be retained and possibly strengthened, perhaps with an inflation-adjusted $5 million estate tax exemption combined with a $1 million gift tax exemption.
  • Any extension of the $5 million exemption will be accompanied or followed by modest reforms, including the elimination of zeroed-out GRATs. The politics of the moment are such that continuation of the $5 million exemption equivalent may depend on curbing the ability of donors to leverage large tax-free lifetime gifts.
  • Estate planners probably will lose the opportunity to make tax-free lifetime gifts in excess of $1 million, but there may still be time to make $1 million leveraged gifts next year before proposed grantor trust restrictions take effect. Those restrictions could be retroactive. 
  • The imminent expiration of the tax preference for qualified dividends may prompt lawmakers to accept a compromise where a tax rate of 20 percent is imposed on both dividends and capital gains. The 35 percent top rate on ordinary income is less likely to be negotiated.  
  • The 3.8-percent Medicare tax on investment income in IRC §1411 will take effect as scheduled.
  • Recent enthusiasm for curbing itemized deductions has immediate implications for charitable deduction planning. On balance, the greater risk of a missed opportunity is a failure to make charitable gifts and take deductions this year which may become less valuable next year and beyond even if rates rise.
  • Taking additional retirement distributions this year may be worthwhile for California taxpayers subject to higher tax rates in 2013 on income over $250,000 ($500,000 for married taxpayers) under Proposition 30.

A detailed discussion of these items will be in the December issue of CEB’s Estate Planning & California Probate Reporter. Also check out CEB’s Drafting California Irrevocable Trusts §§2.5A–2.5F, 5.1A.

Check out our other estate planning blog posts!

© The Regents of the University of California, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

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