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Witnesses Continue Estate Tax Battle

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Witnesses asked the Senate Finance Committee to help taxpayers plan for the future by adopting a simpler, more predictable estate tax system.

Sen. Max Baucus, D-Mont., chairman of the committee, started off the hearing by emphasizing the unpredictability of the current system.

“A Chinese proverb says, ‘Planning lies with men; success lies with heaven,’” Baucus said. “That’s certainly true with the estate tax. No matter how hard people plan, what estate tax their family will pay can be largely a matter of chance. It can be pretty much up to heaven.”

Dennis Belcher, a Richmond, Va., lawyer who was chairman of the Task Force on Federal Wealth Transfer Taxes, said many clients complain about their inability to plan for the federal transfer tax burden.

Belcher, who testified on his own behalf and not on behalf of any organization, said taxpayers can plan more effectively if they know what the law will be in the future.

The confusion is especially great among owners of family owned, closely held businesses; Belcher said:

“Because of the illiquid nature of a closely held business, federal transfer taxes present a serious obstacle to a closely held business surviving the death of the business owner,” Belcher said. “The shortfall of sufficient liquid assets to pay the federal transfer taxes incurred as a result of the business owner’s death may necessitate a forced sale or liquidation of the business, thereby preventing the continuation of the business.”

Federal law does allow for payment of estate taxes on an installment basis, but the system for doing so does not reflect the modern business world, Belcher said:

The federal installment payment system does not address new forms of doing business, such as limited liability companies, limited liability partnerships and business trusts, Belcher said.

“A closely held business owner must select carefully the type of business entity for the business enterprise to preserve the ability for the business owner’s estate to pay the estate tax in installments under the installment payment provision,” Belcher said.

Portability is another concern, said Shirley Kovar, a San Diego lawyer who spoke for the American College of Trust and Estate Counsel, Los Angeles.

The individual exemption is $2 million per individual, and “it is common to say that a married couple would have twice that exemption, but that would not be accurate,” Kovar said. “Rather, under current law, upon the death of the first spouse and the transfer of all assets to the surviving spouse, the $2 million exemption of the deceased spouse is lost. When the surviving spouse dies, her estate may contain the assets of both spouses, but the estate of the surviving spouse will only have a single $2 million exemption.”

If the individual exemption were portable, that would simplify the transfer process and also would fit with other federal tax policies, such as the joint return policy, that treat married couples as a single entity, Kovar said.


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