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Financial Planning > Tax Planning

Estate Tax Relief Or Political Illusions?

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With their repeal of estate taxes, Congress and the administration have made it nearly impossible for us to help our clients develop prudent and reliable estate plans.

We could argue whether estate taxes are just. But thats a different discussion. This is not a philosophical debate about the redistribution of wealth verses confiscatory double taxation. This is about creating the mirage of the elimination of estate taxes for political gain.

As a result of The Economic Growth and Tax Relief Reconciliation Act of 2001, beginning next year, estate tax rates will be reduced and credits increased until complete repeal of the tax in 2010. Its worth noting that the most significant relief is toward the end of the decade.

Under the new rules, when the estate tax goes, so does the unlimited benefit of a stepped-up basis on inherited assets. Thus, a new capital gains tax will be levied on heirs ability to spend their inheritance. The estate tax will effectively be replaced by a new capital gains tax. It looks like a game of Three-Card Monte.

Many would gladly accept the trade of estate tax for a lower capital gains tax but for the artifice here: All the tax-law changes sunset in 2011. Sunset means they go away and we revert to todays rules. It has been left up to a future Congress and president to extend or make these new rules permanent. This will be difficult to do as the taxes, generated when the baby boomers wealth is transferred to younger generations, become a much more significant revenue source over the next couple of decades.

Why did our leaders plan to eliminate a tax but then bring it back? Its simple–we cant afford the reduction in revenue. Under this new plan there will be little effect on projected revenue over the next eight years. Not so coincidentally at a time when–under their best-case scenario–the administrations biggest concern will be planning for a presidential library, not re-election.

So, the politicians have declared a victory in repealing the estate tax when in reality there is only limited relief while the current lawmakers are around and then a brief window of repeal.

So who does the estate tax “repeal” really help? Its a bonanza for those who are able to plan for a “timely” death in the year 2010. For everyone else with a sizable estate, it has created uncertainty and headaches. At best, it plays to those who bought into the sensational rhetoric of “death taxes.” Lets call it what it is–smoke and mirrors designed to give the appearance that a campaign promise has been kept.

To underscore the mind-set of the politicians who developed such a plan, its worth examining the judgment that was (or was not) put into the tax bill as a whole. For a moment, set aside the confusion Congress and the president have created with regard to estate planning and consider the approach that was taken on the act.

The legislation is predominately a reduction of income taxes. Again, the philosophy of the appropriate amount of tax is not the issue. The flawed planning is what is alarming and could very well have negative implications down the road.

It seems that this bill was passed rather hastily to honor campaign promises at the expense of sound financial responsibility. How in good conscience could our lawmakers pass and the president sign tax-law changes that will lead to a reduction in revenue before they decide how much money ought to be spent to run our country? Indeed, the president has promised to spend more on defense and education, yet his own tax legislation deprives federal coffers of the money to invest in such areas.

If we, as financial professionals, were to recommend to our clients that they curtail their income and ignore debt, we would not be doing our job. And if we dispensed that advice before even figuring out the clients expenses, wed all be in a heap of trouble. Yet our elected leaders have effectively served up such twisted and wrongheaded counsel.

These revenue-reducing measures come at a time when weve finally started making a dent in our national debt. When our leaders tell us “Its your money,” they need to remember that its also our debt. Isnt it also obvious that the timing is bad for these changes?

History shows that our economy runs in cycles and we therefore cant count on budget surpluses based on rosy forecasts. Does the administration really believe that a tax cut could artificially buoy our economy from its natural propensity to ebb and flow?

No doubt partisan economists could argue the points above. And there could be the typical, double-talking political babble that might trick some of us. But as the smoke clears and mirrors are removed, will anyone still believe that we have estate-tax repeal? Reform? Relief? A more appropriate name may be the Estate Tax Repeal Disappearance Act.

, CLU, ChFC, is with Capitol Financial Partners, Vienna, Va.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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