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Party Time in Washington: Estate Tax Repealed! (Almost)

Congress’ springtime discovery of almost $1 trillion of spare change in the federal budget unleashed a flurry of tax reduction and spending bills. Like kids in a candy shop, feverish activity during July culminated in, drum roll please, repeal of estate and gift taxes!

Well, almost. Unfortunately, I’m a skeptic. Every year in this column, I dutifully report legislative proposals to reduce or eliminate the transfer tax burden. Every year, the proposals get whittled down in the political process. Why? Dead people don’t vote (except in the South) and “rich” people are in the minority (except in Silicon Valley). As I write this column, I believe that the stage has been set once again for a disappointing compromise.

Throughout the summer, legislators again thumbed their noses at President Clinton’s three-year effort to close estate tax loopholes. Many legislators proposed to repeal or dramatically reduce transfer taxes. But, that’s politics. Proposals like these historically go nowhere. They are cheap ways to appease constituents.

However, in August, both houses of Congress actually passed a phased-in total repeal of gift, estate and generation skipping taxes. Never before have we come this far. Do we have a chance? I hate to be the bearer of bad tidings, but the answer is “no.” There are many reasons, but two bear mention.

First, President Clinton will veto the bill when it is presented to him in September. He wants overall tax cuts of about one third of the almost $800 billion passes by Congress. Neither the Senate nor the House has the votes to override that veto. Compromise will be necessary to get legislation actually enacted. The sizable $65 billion cost of complete repeal of transfer taxes most likely will be compromised, particularly in light of Clinton’s views on the matter.

Second, Congress’ bill does not really do what it purports to do even if Clinton signs it into law. The popular press reported a phase down of the transfer tax rates (in fact, the rates phase down to around 45% in 2008) and complete repeal in 2009. Unfortunately, a little noticed provision based on an obscure Senate rule causes virtually the entire bill to expire after September 30, 2009. After that, we would return to current law.

So, even if the bill is enacted into law, you will have a nine-month window in 2009 to either die or to give away your estate and avoid transfer taxes entirely. Heck of a deal I would say.

Frankly, all this silliness indicates that, despite Congress’ passage of the legislation, we are still merely in a period of political posturing. Republicans hope to rally grassroots support over the summer recess. But, a groundswell is unlikely. There likely will be legislation enacted this fall. However, as it relates to transfer tax relief, my best guess is that it will include:

  • A modest transfer tax rate reduction, with the top rate perhaps declining from 55% to 50%;
  • Some increase in the $650,000 exemption (perhaps accelerating the current law phase-in of $1 million by 2006).
  • Some much-needed relief for failure to allocate the generation skipping transfer tax exemption to gifts in trust (first reported in my February 1993 column).

Of course, any relief is better than nothing. You can help by writing letters to your Congressmen and to the President. But, I don’t expect to see estate planners in the soup kitchens any time soon.

 

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