UPDATE: GETTING PERSONAL: Estate Tax Takes Shape In Campaign

(Updated to add information about estate-tax law sunset in the second paragraph.)

   By Arden Dale 
   A DOW JONES NEWSWIRES COLUMN 

NEW YORK --Estate-tax talk on the campaign trail is helping to resolve a very thorny tax problem for the rich.

Making a plan to shield an estate from the federal death tax has been tricky for financial planners since the Economic Growth and Tax Relief Reconciliation Act of 2001 phased in a series of changes over the past few years. The law sunsets at the end of 2010, and there has been much uncertainty over how estates will be treated after that.

The future seems clearer now, though, as Senators Barack Obama and John McCain outline their plans for the tax. A new study by the Tax Policy Center that analyzes their positions concludes Congress is likely to reform the estate tax to target the very largest estates.

And, many tax planners now think estate-tax legislation is likely by the middle of next year, according to Michael Martin, a tax advisor in Independence, Mo., who is founder and president of Mike Martin & Associates.

This year, estates over $2 million can be taxed as much as 45%. In 2009, the threshold will rise to $3.5 million. In 2010, the tax will be repealed for a year, but reinstated in 2011 at up to 55% on estates over $1 million, the pre-EGTRRA rate.

The looming one-year tax holiday in 2010 has spurred gallows humor about keeping dying relatives on life-support until then. All joking aside, however, many planners have been flummoxed about a strategy for their wealthy clients.

"Quite frankly, they're all tearing their hair out," said Thomas Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants. "You like to have an estate plan and have clients sign it."

In this case, Ochsenschlager said, "it looks like they're going to have to pull these out of the files after the election, and wait for Congress to pass the statutes."

The Tax Policy Center study concludes that "it seems clear Congress will neither allow the estate tax to expire in 2010 nor return to its pre-EGTRRA form in 2011.

Len Burman, a senior fellow at the Urban Institute and co-author of the study, said he thinks it most likely that Congress will make the 2009 exemption and rate permanent.

Both presidential candidates would scale back - but not eliminate - the estate tax. McCain wants to apply the 15% long-term capital gains rate to estates worth more than $5 million starting in 2010, according to the study. Obama proposes a 45% tax on estates worth more than $3.5 million, the parameters currently scheduled to apply in 2009.

Obama's plan would cut down the number of estate tax filers dramatically, according to the study. In 2011, 17,400 estates would be taxed under his proposal, roughly 15% of the 125,000 under current law. The 7,200 taxable returns would pay about $21 billion in estate tax, a little over half of that under current law.

Under McCain's plan, only 3,600 estates would pay the tax in 2011. The high exemption and low rate would reduce estate-tax liability almost 90% to $4.9 billion, according to the study.

The study estimates that, in 2008, just 15,500 estates will owe the tax, representing 0.6% of all people who die. In 2009, when the exemption rises to $3.5 million, the number of taxable estates will fall to 6,200. More than four-fifths of the estate tax is paid by the top 1%, and close to half is paid by the richest 1 in 1,000 individuals.

(Arden Dale is a Getting Personal columnist who writes about personal finance; she covers topics including tax and estate planning, retirement, investment strategies, and financial needs of small businesses. She can be reached at 201-938-2052 or by email at arden.dale@dowjones.com.)

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