Obama Plans to Freeze the Federal Estate Tax at Current Levels and to Make the Estate Tax Marital Deduction "Portable"

The Wall Street Journal recently reported here and here that the new administration has decided to permanently lock the estate tax in at the rate and exemption levels that took effect this year. That change in the law would exempt estates of $3.5 million — $7 million for couples — from any taxation. The value of estates above that would be taxed at 45%.

In addition, “portability” of the estate tax marital deduction will be part of the plan. A “portable” marital deduction would mean that the exemption per person — $3.5 million this year — would become transferable from one spouse to the other, in effect doubling the surviving spouse’s exemption. In essence, that means that spouses would be able to use each other’s estate tax exemption without first having to set up complex and costly trusts or undertake other estate planning measures that many people now are required to do. As a result, the AB trust system, long the centerpiece of most estate plans for married couples, may soon become a thing of the past. The “AB trust” system is an estate planning technique by which married couples maximize the use of both of their federal estate tax exemptions by using two testamentary trusts in their wills. The testamentary trusts are known by a variety of names, such as “AB trusts”, or “credit shelter trusts”, or “exemption equivalent trusts” or “bypass trusts”.

Jason Furman, Deputy Director of the National Economic Council in the Obama administration, said: “Families should not be required to undertake complex and unnecessary financial planning or be penalized for failing to take advantage of sophisticated financial strategies.” Mr. Obama “believes we should eliminate the estate tax for 99.7% of families — and this is part of his plan to accomplish that goal,” says Mr. Furman.

However, many people still might benefit from setting up trusts and taking other steps anyway, according to Blanche Lark Christerson, managing director at Deutsche Bank Private Wealth Management in New York. That includes many people who live in states, like New Jersey, that have “decoupled,” or separated, from the federal estate-tax system. “Also, bear in mind that even if there were no potential tax consequences and apparent need for a trust, you still might want one” for other reasons, such as protecting assets from creditors, protecting minor or disabled children or for other reasons.

On another issue, the new administration wants to retain the current system for calculating capital gains taxes on the sale of inherited assets. This system is scheduled to continue through next year and undergo major changes in 2010. Critics say those changes would create additional complexity and impose unfair recordkeeping burdens on taxpayers.