Barack Obama Estate Tax Plan

In November I attended a tax seminar in San Francisco.  One main topic that was discussed during the event was - What is the new administration is going to do regarding the repeal of the estate tax and related matters?  Below is some recent information from various tax services I use that sets forth some of the comments mentioned in the tax seminar.  What this will mean is that a husband and wife will be able to transfer $7 million to their children free of death taxes starting next year.

One major point I would like to stress from the tax seminar is that now may be the best time to do gifting.  The reasons are basically two fold.  First, the value of your assets may be at their lowest point in years.  If you believe that they are going to increase over the next few years then this is a major factor to make a gift.

Second, is that the next administration may want to follow through with what the Clinton administration failed to do by trying to eliminate valuation discounts.  This is potentially a big deal and the window to take advantage of this may only last a few more months.  The second discussion below on valuation discounting points out the possible time limitation for gifting.  Starting in 2009 the annual gifting exclusion amount will increase to $13,000 per person!

Barack Obama Estate Tax Plan. President-elect Barack Obama includes estate tax reform in his middle class tax cut plan. His estate tax reform plan would (1) eliminate the scheduled repeal of the estate tax in 2010 (and the return of the pre-2001 rates and rules in 2011), (2) preserve the present rules for determining the basis of property received at a decedent's death, rejecting the application of carryover basis at death, (3) set the applicable exclusion amount at $3.5 million, indexed for inflation after 2011, (4) make the unused applicable exclusion amount of a deceased spouse available to the surviving spouse, and (5) set the top estate tax rate at 45%.  

Discounts and Valuations  Discounts are a cornerstone of many estate planning leveraging techniques. A discount is simply illustrated as follows: a 30% interest in a $100 business is worth less than $30 because the minority interest is difficult to market and has no voting control. Has recent market turmoil legitimately increased the level of discounts on certain transactions?
 
What about valuations? While the decline in the value of marketable assets is pretty obvious, other asset values have also been compromised. To understand the impact, consider an approach of building up a capitalization rate for valuing real estate assets in today's environment: [Corporate bond rate + Premium for lower liquidity of target asset as compared to bonds generally + Premium for greater management difficulty of real estate + Premium for unique difficulties of assets in question (location, difficulty to liquidate) + Premium for additional management burdens of residential real estate, vacancy and credit risks of tenants in the actual properties involved + Premium to reflect unique factors in 2008 = Total Capitalization Rate.]
 
Credit risks may be far greater than they have been in years. Unique factors certainly exist in the current market.
 
For clients that have not yet consummated significant leveraged gift or IDIT sale transactions now may be an opportune time while higher discounts might be justified, asset values may be depressed, and interest rates remain low.
 
The possibility of more restrictive estate tax rules in the next administration provide further encouragement for clients to proceed and not delay planning.   
This may be a unique time in history for the transfer of wealth.

Defer Gifts?  Gift plans to reduce taxable estates should be revisited. Does your client still have adequate assets to continue a planned gift program? Have the client's retirement assets declined to the point that gifts should be deferred? Should powers of attorney which include broad gift provisions be revised to prevent gifts that may no longer be viable?
 
Accelerate Gifts?  The opposite situation may also exist. The client's heirs may have been so negatively impacted by the economic downturn, e.g. job loss, house in foreclosure, etc. that parental (or other benefactor) gifts are essential and the impact on the parent/donor's economic position of secondary importance.
 
In such events a gift program, perhaps combined with intra-family loans and other measures (see below) may be urgently needed. If such assistance is important a number of issues should be reviewed with the client:
 
Reallocate Gifts?  What of gift equalization? Many clients are adamant that gifts between children and their family lines be equalized. However, if one child has lost his or her job and home, these prior mandates may not longer be desirable.  If gift equalization is not mandated should some type of equalization or adjustment for unequal lifetime gifts be provided under the client's will?
 
Rethink Fiduciaries?  Who should be named to serve as fiduciary to make the above decisions? If under the client's current power of attorney gifts by child family line were mandated to be equalized, the client may have had no problem designating children, perhaps in age order, to serve as agents.
 
However, if gifts are to be made based on need, or other more qualitative or flexible criteria, the client may wish to reconsider the use of a more independent fiduciary.
 
Similarly, if a sprinkle trust is to be used under the client's will to informally address some type of equalization, an independent trustee might be desirable, or depending on the distribution standards essential.