Republicans Consider Keeping Estate Tax Alive for the Very Rich

Wall Street Journal • January 19, 2005

By TOM HERMAN and RACHEL EMMA SILVERMAN
Staff Reporters

Page D2

Republican congressional leaders next week are expected to revive efforts to kill the federal estate tax.

Lawmakers and lobbyists leading the death-to-the-estate-tax campaign say they have more supporters than a year ago. But it is unclear if they have enough votes in the Senate to eliminate the tax permanently, and thus several compromise approaches with Democrats and Republicans are likely to be considered.

One idea under consideration calls for taxing only the very richest estates. This plan includes sharply raising the basic estate-tax exclusion, now $1.5 million, to the $5 million to $7 million range, or possibly even higher. It also calls for cutting the top federal estate-tax rate, now 47%, to the top capital-gains-tax rate, now 15%.

In 2003, the IRS received a total of about 30,600 estate-tax returns where the gross estate was $1 million or more and reported an estate-tax liability. Of those, only 3,486 were for estates of $5 million or more.

For many Republican loyalists total repeal is an article of faith, and they would be incensed by anything short of that. But that may be an unrealistic goal, especially in view of the huge cost of total repeal in terms of lost revenue to the federal government. "I honestly don't know" if total repeal is possible, says Sen. Jon Kyl of Arizona, chairman of the Senate Republican Policy Committee. But he emphasizes that sharp reduction or permanent elimination of the tax will be "one of the major items" on the agenda this year. "I think it has got to be done this year. We may have only one good chance to do this, and it's now," he says.

Planning amid all this uncertainty is a hot topic among estate-planning advisers these days, discussed in client newsletters and at industry seminars with titles such as "Estate Planning While You Wait." Many financial planners are urging their wealthiest clients to assume the federal estate tax will continue to exist at some level. Thus, they recommend sophisticated strategies such as those involving the use of trusts and partnerships, life insurance and charitable-giving techniques that can slash or even eliminate hefty estate taxes.

Lawyers are encouraging clients to create flexible wills and trust documents that allow for alternate provisions if the federal estate tax is modified or repealed. Another technique that some planners suggest is the use of so-called disclaimers. The tax code allows nine months to give up -- or disclaim -- all or part of an inheritance. Although disclaimers can be complicated, the technique can give heirs, such as surviving spouses, effective control over how much they choose to inherit. That allows them to adjust that amount as estate-tax rules change, while still keeping enough money to live on, and can help reduce the estate-tax bite.

Most proposals to cut or eliminate the federal estate tax face significant roadblocks. Opponents argue that total repeal would represent a massive giveaway to a tiny number of super-rich Americans -- and that it would be enormously costly to the U.S. Treasury. Many multimillionaires and billionaires who would benefit handsomely from permanent estate-tax elimination have signed a petition supporting "responsible reform but not repeal," says Chuck Collins, co-founder of Responsible Wealth (www.responsiblewealth.org), an organization of business leaders and wealthy people concerned about wealth inequality. Mr. Collins, co-author with Bill Gates Sr. of a 2002 book "Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes," favors raising the exclusion so that the tax applies only to very large fortunes, rather than killing the tax completely.

Whatever the case, financial planners and tax specialists hope Congress will do something this year to change the system, if only because current law makes it so tough to do intelligent planning. Under today's law, the basic exclusion from the federal estate tax for 2005 is $1.5 million. (However, a spouse typically can leave everything to the other spouse free and clear of federal estate taxes.) This $1.5 million exclusion is scheduled to increase to $2 million in 2006, remain at $2 million in 2007 and 2008, and then jump to $3.5 million in 2009.

In 2010 the federal estate tax is scheduled to disappear completely -- only to return in 2011 with an exclusion of $1 million. (One other compromise plan that may come up this year: Extend repeal for a few years beyond 2010, but not permanently.) Meanwhile, the top federal estate-tax rate is scheduled to decrease in stages. This year, it's 47%. Next year, it's set to decline to 46% and then, in 2007, to 45%.

There also are complex state-tax issues to consider, which makes planning even more difficult. Many states have their own set of tax rules when someone dies, such as shielding less money from their estate taxes than the federal system. For example, New Jersey's exclusion is $675,000, rather than the current federal exemption of $1.5 million. Some estate planners are urging wealthy clients in high-tax areas, such as New York and New Jersey, to consider moving to places with no state estate tax, such as Florida.

There also may be significant changes in the rules affecting how much, if anything, heirs owe in taxes when they sell assets they inherit. But the outlook remains blurry.

Copyright 2004 Dow Jones & Company Inc.

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