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While on the campaign trail against then-Vice President Al Gore,
then-Governor George W. Bush promised to slay the “death tax,” if
elected President. Making good on that promise just six months into his
term, President Bush signed a death warrant for the death tax. As part of
the largest tax reduction in two decades, known as the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), this death
warrant may be rather illusory given the proven resiliency of the death
tax. Moreover, because of a curious provision in EGTRRA 2001 itself, the
whole exercise may be like attempting to slay a werewolf with something
less than a silver bullet.
Revenue
Replay
The death tax is nothing new. In fact,
Americans have seen three variations of the death tax come and go. The
current death tax, the target of EGTRRA 2001, is the fourth variation.
The first death tax was enacted at the end of the
eighteenth century to finance American naval expansion during tensions
with France. It was repealed in 1802. The second death tax arose following
the outbreak of the Civil War. It was repealed in 1870. The third death
tax was implemented at the end of the nineteenth century to finance the
Spanish-American War. It was repealed in 1902. Shortly thereafter, in
1916, the current death tax was enacted to help finance America’s entry
into World War I. This was to be the War to End All Wars.
Uncharacteristically, that fourth version of the death tax was not
repealed when the are ended and the doughboys returned from France.
In the years that followed, the death tax has
helped the federal government underwrite Depression Era programs,
subsequent foreign wars, the War on Poverty, the Space Program and the
Cold War. Throughout the last century, the continued expansion of the size
and scope of the federal government drove a corresponding need for
additional tax revenues. Not surprisingly, every attempt to reform or
repeal the death tax has provided fertile soil for economic class warfare.
Against this backdrop, EGTRRA 2001 is in form the product of current
political, social and economic forces…but may be in substance mere smoke
and mirrors.
Key
Changes
Fundamental to the death tax is the amount
each taxpayer may exclude from the tax. Known as the Unified Credit
Effective Exemption Amount (Exemption Amount), this amount was scheduled
to gradually increase from $675,000 in 2001 to $1 million in 2006. This
scheduled increase was based on the Taxpayer Relief Act of 1997 (TRA
1997), the most recent legislation affecting the death tax. Now, under
EGTRRA 2001, this increase to $1 million has been accelerated to 2002.
Concurrently, the top death tax rates will be reduced with the repeal of
rates in excess of 50 percent (also repealed is the five percent surtax
which phases out the benefit of the graduated rates for estates over $10
million). From 2003 until 2009, the Exemption Amount continues to increase
to a high of $3.5 million until the death tax is repealed effective 2010.
[Sidebar: In 2002, the Exemption Amount for gift
tax purposes becomes $1 million, but does not increase thereafter. The top
gift tax rates are the same as the death tax rates. Unlike the death tax,
however, the gift tax is not repealed in 2010, but merely adopts the top
individual income tax rates in effect at that time under EGTRRA 2001.
Additionally, EGTRRA 2001 greatly simplifies the Generation-Skipping
Transfer Tax (GSTT), increasing its Exemption Amount in lockstep with the
death tax. Like the death tax, the GSTT is repealed effective 2010.]
Sunrise,
Sunset
Like a werewolf felled by a common lead
bullet instead of a silver bullet, the death tax is not really dead after
2010. In fact, to ensure compliance with the Congressional Budget Act of
1974, all provisions of EGTRRA 2001 sunset for tax years beginning
after December 31, 2010.* Accordingly, to borrow from Mark Twain, the
rumors of the death of the death tax are greatly exaggerated.
Not only does EGTRRA 2001 sunset in 2010, but
also its provisions are subject to change before then due to shifting
political winds. Between its enactment and its repeal, Americans will vote
in five congressional election cycles and three times for their president.
In addition to shifting political winds, shifting demographics may
preserve the death tax well into the future. Consider this: The leading
edge of the baby boom generation will reach age 65 in 2010. They will be
retiring and lining up for the Social Security and Medicare programs in
record numbers. With the budgeted cost of death tax repeal forecasted to
be $50 billion in 2011, it may seem more palatable for politicians to once
again tax the dead (i.e., non-voters) to provide for the living (i.e.
voters).
In addition to the sunset provision, shifting
political winds and shifting demographics, throw in the uncertainties of
the global and domestic economies, along with the historical potential for
military conflicts, and the only thing certain about the death of the
death tax is its uncertainty.
Winners
& Losers
There are winners and losers in the game of
tax politics. The real winners under EGTRRA 2001 are the taxpayers with
otherwise taxable estates who are fortunate enough to die between January
1, 2010 and December 31, 2010. Potentially the biggest losers will be
state governments. Many states have a death tax that is tied to the
maximum state death tax credit permitted for calculating federal estate
taxes.
Under EGTRRA 2001, this current credit amount is
reduced by 25% in 2002, 50% in 2003, and 75% in 2004. The state death tax
credit is repealed effective in 2005 and replaced by a deduction
for death taxes actually paid to a state. With state governments
experiencing revenue shortfalls, some pundits predict this could force
states to institute their own death tax regimes to replace revenues lost
to repeal of the state death tax credit.
Proper
Planning
Until Congress and the President can repeal
incapacity and death, there will be a need for proper Life & Estate
Planning. Space does not permit a comprehensive review of the non-tax
reasons for planning. Nevertheless, only through proper planning can you
maintain control over your wealth and independence in the event of your
incapacity, appoint the back-up parents for any minor children in the
event they are orphaned, protect the inheritance for and from your heirs,
provide financial support for loved ones with special mental or physical
challenges, meet your competing support obligations if yours is a blended
family, make specific distributions of your assets to specific persons and
ensure the successful continuation of your family business.
Summary
The breadth and depth of the EGTRRA 2001 tax law
changes extend well beyond the scope of this brief and limited overview.
As with any major tax law changes, it may be prudent to consult with legal
counsel to evaluate the impact of the new death tax on your plans.
* Source: Joint Committee on Taxation, Summary of
Provisions Contained in the Conference Agreement for H.R. 1836, the
Economic Growth and Tax Relief Reconciliation Act of 2001, JCX-50-01
(May 26, 2001), page 13
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