What may surprise many of your clients is that permanent repeal of the estate tax would not necessarily mean the end of taxation. Those with significant low-basis assets or business interests could very well wind up with a more difficult tax situation–and an unpredictable one as well.

In 2010, the current law provides that anyone who inherits property may also potentially incur a large capital gains tax liability that did not previously exist.

When the estate tax is repealed in 2010, a modified carry-over basis rule immediately goes into effect and death becomes an income tax problem, rather than an estate tax problem. The basis of assets received from a decedent will carry over from the decedent, rather than be stepped up to fair market value at the date-of-death or alternate valuation date.

Based on history, the estate tax debate will continue long after the current administration leaves office. President Bush, a leading proponent of estate tax repeal, will not be in office in 2010 when the estate tax is repealed for one year. The electoral process will bring us two presidential elections (2004 and 2008) and three congressional elections (2004, 2006 and 2008) before then. As we all know, controlling parties, ideologies and priorities of elected officials can change at the drop of a hat.

In 2010, the first “baby boomers” become eligible to collect Social Security. As this massive portion of our countrys population begins to draw on Social Security, Medicare and other social programs, the government will need to find ways in which to raise funds.

Meanwhile, the 10-year $5.6 trillion surplus projected a year ago has vanished, and the federal government posted a $159 billion deficit for the fiscal year ending Sept. 30, 2002. The U.S. government registered a $127 billion surplus the previous year. The nonpartisan Congressional Budget Office (CBO) projects the deficit for fiscal years 2002-2010 to total more than $2 trillion (on-budget projection, which does not count surpluses from the Social Security Trust Fund). Those deficits could grow bigger if the U.S. invades Iraq, a military endeavor that the Bush administration estimates could cost as much as $200 billion.

All these factors raise the question, “Where will the money come from?”

–Daniel Munroe


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 6, 2003. Copyright 2003 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.