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Financial Planning > Tax Planning > Tax Reform

Estate Tax Repeal Battle Heats Up--Again

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A Senate Finance Committee hearing brought together parties on both sides of the issue of repealing the estate tax.

Some witnesses at the Nov. 14 hearing said that if the estate tax isn’t going away, Congress needs to at least stabilize it and help ensure that family-owned businesses aren’t forced to sell their assets below value in the rush to meet their estate tax liabilities.

Speaking as an opponent of estate tax repeal, Berkshire Hathaway Chairman and CEO Warren Buffett told the panel that the estate tax should be preserved to avoid a “dynasty of wealth” that could erode the country from a meritocracy to a plutocracy.

“I believe in keeping the equality of opportunity,” he said.

Buffett also took issue with the “death tax” label attached to the estate tax by opponents, saying the term showed the “intellectual dishonesty” of those who use it. “It’s clever, it’s Orwellian, and it is, if you pardon the expression, dead wrong,” he said. Only a very small number of Americans, he added, pay the tax, roughly the equivalent of one half of one percent of the population. “You would have to be at 200 funerals to attend one where the decedent paid the tax.”

Furthermore, Buffett argued that those calling for an end to the estate tax rarely speak of where the government would find other sources of income to make up for what he said was roughly $24 billion annually. “They just say ‘free us,’ ” he said. “ They don’t say who to further shackle.”

Other witnesses at the hearing told a different story, however, arguing how estate tax liability has forced family-owned businesses to sell assets or could force families to sell their businesses altogether.

Dean Rhoads, a rancher and state senator from Nevada, told the panel how he and his wife moved onto land purchased by his in-laws and added to a ranch they owned. When his mother-in-law died, Rhoads said, the family was forced to sell that land, which had also served to produce hay for their cattle, to pay the estate tax.

“When my father-in-law died in 1995, there was no more land left to sell if we wanted to survive in the ranching business,” he said. “Based on the ranch’s value, the tax we now owed, with interest added, was over $340,000. Therefore we have been paying $18,000 in estate taxes, plus interest every year, which we are continuing to pay. We have had to borrow money to make these payments. We pay this money back through the revenues produced by our ranching business.”

Eugene Sukup, chairman of Sukup Manufacturing Company, noted that if a family is forced to sell assets in a short time period, and that the estate tax in some cases must be paid within 9 months. “If we have to sell in 9 months, as it goes, that’s a fire sale,” he said.

Just as problematic is the estate tax law itself, which phases down the tax gradually, eliminates it in 2010 and brings it back full force in 2011. “It’s nearly impossible to plan for a tax that changes every year,” he said, noting that the 2011 estate tax would have an exemption half of the current $2 million exemption and a rate of 10% more than the current 45%. “The uncertainty of the tax means that we have to plan for the worst case scenario, costing us even more money.”

Buffett agreed that the changes and scheduling in the estate tax law are problems, calling the setup “an abomination.” When asked what shape he would form the estate tax into, Buffett suggested an exemption of $4 million indexed for inflation and a rate that increases gradually at first but putting the heaviest burden on the largest estates.

For those who complain about paying the tax, Buffett noted that “it’s a high class problem” and that the money collected through the estate tax could be used to provide a $1,000 credit to the 23 million families in the U.S. with annual incomes of $20,000 or less with money left over.

“When a person wins a $100 million lottery, the story in the paper always notes that they had to pay $40 million in taxes,” he said. “I send that person a congratulatory note.”

Buffett also offered a proposal, which he said came to him during the hearing, to address the plight of family-owned businesses by having the estate tax assessed on the business but not collected. The tax liability would remain and collect interest, he proposed, and would be paid when the business was ultimately sold by the family.

Sen. Jon Kyl, R-Ariz., questioned the lobbying effort by the life insurance industry to maintain the estate tax, noting that avoiding the tax provided the industry with a steady source of revenue. Kyl noted that Buffett “spoke with passion” on estate tax issues and questioned if he owned any life insurance companies. In response, Buffett said Berkshire owns only one company in the life insurance business, a reinsurer, and that it accounts for “well under one half of one percent” of Berkshire’s profit.

The life insurance industry, Kyl said, “lobbies hard” against estate tax repeal, and “can make a lot of money because their products are one of the ways to shelter assets.”

Ultimately, he added, they have thus far been successful. “The votes aren’t there to repeal it,” he acknowledged, “despite its unfairness.”

Other panel members shared that view, though not necessarily as a negative, including Sen. Ken Salazar, D-Colo, and the committee’s chairman, Sen. Max Baucus, D-Mont.

“I think everyone in this room knows we’re not going to repeal the estate tax,” he said. “It’s not going to happen in the foreseeable future.”

In a note to its members, officials of the Association for Advanced Life Underwriting said the most important implication of the hearing is that “with a Democratic majority in both chambers, full repeal of the estate tax is most likely off the table.”

David Stertzer, CEO of the AALU, said Baucus “substantiated that point … today.”

Regardless, Stertzer said, “there is still strong support in the committee for either full repeal or special exemptions for either family-owned farms or small businesses, and these concerns may be reflected in legislation introduced for the mark up tentatively schedule for the spring of 2008.”

However, Stertzer cautioned, “the lack of interest” by House Ways & Means Committee Chairman Charles Rangel, D-N.Y., “in a costly reform package will continue to act as a deterrent [for action] in 2008.”

Larry Raymond, AALU president, added in the summary to members that “while the hearing did not directly address the reunification of the lifetime gift and estate tax exemptions, stressing the importance of this issue remains a focus of AALU.

“Lawmakers need to know that reunification is an integral part of any sustainable, permanent estate tax because it enables clients to do more planning during their lifetime,” he said.

Raymond explained that the deadline for reform draws closer each year, and “we will continue to stress the need for permanent reform enacted before 2010.”


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