Obama and McCain on Estate Taxes

Yesterday was the last debate between Barack Obama and John McCain before the election. Although they did not tread much new ground in their comments, one area that was covered (at least a little bit) was taxes.

And speaking of taxes, what are the candidates positions on the estate tax? As I posted previously, Obama favors freezing the estate tax at the 2009 level ($3.5 million exemption, 45% rate), whereas McCain's plan is for a $5 million exemption and a 15% rate, which matches the capital gains tax rate.

A major issue, on which both candidates seem to agree is portability. Basically, it means that married couples could use their spouse's exemption in their estate. This was reported on in yesterday's Wall Street Journal. Here's how it would work: Currently, each spouse's estate gets an exemption (for 2008 it is $2 million, increasing to $3.5 million in 2009) before the estate tax is assessed. When one spouse dies, and they leave their estate to the surviving spouse, it passes free of taxes (note: this is for opposite-sex spouses only at the federal level, courtesy the Federal Defense of Marriage Act.) to the surviving spouse. The surviving spouse, however, only gets to use their exemption. For example, if Husband dies and leaves his $2 million estate to Wife, and Wife has an estate of her own of $2 million, she will now have an estate of $4 million, but currently only a $2 million exemption. If Wife were to die this year, she would have estate tax exposure on the $2 million she inherited from her Husband. With portability, she could use her husband's $2 million exemption and avoid estate tax exposure. This would make estate planning somewhat less complex for opposite-sex married couples.

The primary purpose of estate planning should not be tax avoidance, but in reality, it plays an major role. Even with portability, there are many non-tax reasons for trusts of various complexity. That's a post for another time.