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September 09, 2001 at 08:00 PM
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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.
