Since Barack Obama’s election many have asked me what I think will happen to the estate tax. My reading of various news reports, tax industry analysts and other sources leads me to believe that the Obama team hasn’t yet decided exactly how to handle their campaign promises regarding taxes. They appear to be gauging the effects tax increases might have upon our fragile economy.

To evaluate how any new legislation might affect estate tax law requires an understanding of existing law. Anyone dying during the 2008 calendar year receives a $2 million estate tax exemption, less any taxable gifts (generally those in excess of the current $12,000 annual gift tax exclusion per beneficiary) that he or she has made over his or her lifetime. Next year the estate tax exemption increases to $3.5 million. In 2010 the estate tax is replaced by a quasi-capital gains tax system. In 2011 the estate tax exemption returns to $1 million assuming no further legislation, which is the level the exemption was at in 2001 when the Bush tax cuts first became law.

It’s interesting to note that Obama’s campaign platform approved of a permanent $3.5 million estate tax exemption. Various Wall Street Journal reports confirmed his stance as such. Since that time we have all witnessed a historical economic crisis leading to billions, if not trillions of additional government obligations.

Rather than introducing legislation that would increase taxes on the “rich”, which Obama defines as those making more than $250,000 annually, I’ve heard a few of the cable news experts state that Obama and the Congress may decide to simply let the Bush tax cuts expire in 2011. By allowing the Bush tax cuts to expire, the estate tax exemption would return to $1 million and the income tax rates would roughly approach the proposed Obama tax increases for those making higher incomes.

Some political commentators have praised the idea, indicating that by allowing the Bush tax cuts to expire would not require an affirmative vote by the Congress or the President’s signature to raise taxes. Instead, taxes would simply increase all by themselves, providing Democrats with “political cover”.

Jeffrey Pennell, a tax law professor at Emory Law School in Atlanta and frequent lecturer at professional tax and estate planning conferences recently opined that Obama’s camp now proposes a $2 million estate tax exemption. This is the amount currently (2008) in place, which is obviously better than allowing the Bush tax cuts to expire in 2011 but a step back from the 2009 exemption amount just about to take effect.

My take on all of this is that President Obama will not use his valuable political capital to legislate tax increases during this tumultuous time. The idea that he could simply await the expiration of the Bush tax cuts to achieve his proposed tax increases might seem fortunate given his objectives, and could allow him to use political capital to implement more pressing economic policies, health care reform, bailing out the automobile manufacturers and other agenda items. If the economy turns around by 2010 Obama can take on taxes if he needs to. Another benefit to waiting includes the possibility of making tax cuts (or increases, as the case may be) a central issue to the midterm elections.

So what does all of this mean for the estate tax? My guess is that unless we see proposed tax legislation early in the Obama administration, those that now believe he will await the expiration of the Bush cuts will probably end up looking prescient. Moreover, I don’t anticipate seeing the proposal of independent estate tax legislation. Rather, any tax legislation will likely include income and corporate tax reform in addition to estate tax reform. I believe that it’s too difficult to consider and pass piecemeal tax legislation when the new administration has such an overflowing agenda.

In January I’m attending a conference where Professor Pennell and other tax pundits will present their views. The conference is scheduled before Obama’s inauguration so we may not have any more answers than what we have now. But a lot will certainly happen between now and then. In the meantime, I’ll stay on top of it for you.

©2008 Craig R. Hersch