Analysis: Obama tax deal a big gift for America's rich

NEW YORK (Reuters) - More than 40,000 ultra-rich Americans may have another reason to celebrate the holiday season if President Barack Obama’s latest estate tax proposals are passed by Congress.

Visitors tour a motor yacht for sale at the United States Powerboat Show in Annapolis, Maryland, October 17, 2010. REUTERS/Molly Riley

Obama struck an agreement on Monday with congressional leaders on a range of tax issues, including cutting the estate tax to 35 percent and raising the individual exemption to $5 million. The estate tax, which expired this year, is due to return in 2011 at 55 percent with a $1 million exemption.

If the compromise proposal is passed, roughly 40,700 families will avoid an estimated $23.2 billion of estate taxes next year, according to the Urban-Brookings Institute Tax Policy Center. Around 3,500 families would pay an estimated $11.2 billion in estate taxes.

“They’re making the estate tax weaker than it has been for more than seven decades. This is a real mistake,” said Lee Farris, who follows estate taxes for United for a Fair Economy, a group advocating progressive tax policy. “Obama also puts himself in a bad position to negotiate the tax in two years.”

Obama agreed to extend all Bush-era tax cuts for two years, yielding to Republicans, who won big in mid-term elections. The preliminary agreement would renew tax cuts for the middle class, as well as the wealthiest Americans.

“You knew Congress was not going to let the Bush tax cuts expire. There are too many millionaires there,” Ray Madoff, a Boston College law professor and expert on trusts and estates. “This helps an absolutely tiny, tiny portion of the wealthiest people who are passing billions to their heirs tax-free.”

Tax experts now estimate that less than one in 400 families will pay the estate tax, the fewest since the Depression.

The estate tax was not the only gift for the wealthy in Obama’s plan. Despite opposition in his own party, the President proposed extending income tax cuts for two years as well as the 15 percent rate for dividends and capital gains.


Critics of a softer estate tax complain that a tiny minority of Americans are getting an enormous tax break when there is persistent high unemployment, a housing bust and retirement savings are frightening anemic.

There is also a philosophical debate, whether democracy can be undermined when families pass on dynastic wealth, producing generations of heirs who do not have to contribute to society.

Some Democrats voiced opposition to the proposal, which must now be approved by majorities in both houses of Congress.

“We think a progressive tax policy is one of the most important issues for this country and this proposal moves us in the opposite direction,” said Damon Silver, policy director for labor union group the AFL-CIO.

Not surprisingly, advisers to the very wealthy are pleased with this new development. Lower taxes for the IRS mean more money for families and bigger fees for wealth managers.

Over 10 years, the new Obama proposal will collect an estimated $148 billion of taxes, compared with $424 billion under the pre-Bush estate tax plan.

Obama’s earlier compromise proposal, to extend 2009 taxes, would have collected $240 billion.

Congress has taken estate planners on a roller coaster ride over the past few years, shocking advisers by not replacing the Bush tax cuts before the end of 2009 or before the elections.

Even now, though, advisers are not convinced they have a clear view of what taxes their clients will owe.

“Our families are really looking for certainty and permanency,” said Pat Soldano, head of the Costa Mesa, California, office of GenSpring Family Offices. “I just hope Congress really appreciates how important that is.”

David Hamar, head of the tax group at Silvercrest Asset Management, said the proposal makes him think twice about transactions he was pursuing ahead of 2011 tax increases.

Last year, many advisers were convinced Congress would act to prevent the repeal of the estate tax. Lawmakers did not and so wealthy people who died in 2010, such as New York Yankees owner George Steinbrenner, paid zero U.S. estate tax.

The estate tax had been phased out from 2001 until 2010, with the rate decreasing and the exemption rising each year.

This made planning a challenge for advisers unable to forecast when a client would die and what the taxes would be.

“We have no confidence at all that this will be passed by the end of this year,” said William Fleming, a managing director in PricewaterhouseCoopers’ personal finance division.

Additional reporting by Helen Kearney; editing by Andre Grenon