JULY 2000 - Legislation affecting changes to the Federal gift and estate tax law
In 1997 legislation was passed that made extensive changes to the gift and estate tax rules. The changes made by the Taxpayer Relief Act of 1997 were to be phased in over 10 years. At that time, there was general agreement among experts in this area that this legislation was the initial step in doing away with the gift and estate tax laws. One expert predicted that this would happen by 2006.

FEDERAL ESTATE TAX

A few weeks ago the House of Representatives approved a bill to repeal the estate tax. The bill, which is expected to be approved in the Senate, faces a veto by President Clinton. As currently approved, the bill would phase out estate taxes over the next 10 years.

Under current law, the first $675,000 of an estate is exempt from tax, and this amount is scheduled to increase to $1,000,000 by 2006. In addition, all assets left to a US spouse are exempt from estate tax.

The bill was introduced by the Republicans who called it a "death tax that is especially harsh on small businesses and farmers who want to leave the fruits of their labor to their children." The Democrats who did not vote for the bill labeled it a tax break for the rich.

Statistics released by the Treasury Department indicate that only 47,000 estates paid estate tax in 1998. About 4,600 estates paid an average estate tax of $900,000. Some 3,000 estates paid an average estate tax of $3,500,000.

If passed as drafted, the bill would not totally eliminate all assets from tax. Under current law, if you bought stock for $10,000 and it was worth $90,000 at your death, the estate paid tax on $80,000. The bill contains a provision for eliminating a capital gains tax on some assets, but it is feasible that some heirs may still have a large capital gains tax to pay.

One of the more interesting quotes on the bill came from the Chairman of the House Ways and Means Committee who said "the ancient Egyptians built elaborate fortresses and tunnels and even posted guards at tombs to stop grave robbers. In today's America, we call that estate planning." From the above statistics, approximately 3,000 individuals did not do so.

The fate of the bill is uncertain. As the New York Times noted of the current estate law, "it has supported legions of lawyers and estate planners for generations." The bill is one of a number of election year tax bills supported by the Republicans. As usual with tax legislation, politics, not logic or reason, will rule.

STATE ESTATE TAX

What is uncertain is the action of the many States whose estate tax rates are tied to the Federal estate tax rate. Most states will have to re-write their legislation if this bill is passed, and no one knows whether the States will also eliminate the estate tax, or view this as an opportunity to harvest additional revenue.

WHAT TO DO?

Even if the bill is passed in its current form, it will not take effect until 2010. The prudent course would be to assume that the bill would not become law, and continue to plan to minimize or eliminate the "death tax."

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

< back



Expatriate Tax Services LLC, 2000. © All rights reserved.