WAS ESTATE TAX TRULY REFORMED? NO

After fanfare and political rhetoric, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001. During the election, and up to the recent signing, partisan debate primarily centered on the size of the income tax reduction.

However, all of us who have our financial heart and soul invested in businesses, real estate and other semi-liquid assets, anxiously watched the political process and asked ourselves, “Is it really possible that Congress will grow a brain and abolish the profoundly stupid estate tax?”

Optimists were encouraged as both Republicans and Democrats expressed support for President Bush's popular proposal to end the estate tax tyranny on closely held and family owned businesses. All of us who have legacies at risk were cautiously excited.

With the clearing of the cigar smoke, we can now evaluate what has been purported to be revolutionary estate tax reform.

I am acutely interested because George B. Jones & Co. is responsible for addressing tax-avoidance opportunities for our diverse clients. During this time in our nation, it is very difficult to criticize our President, especially when I totally support his military and security actions.

But some things just need to be said. Regretfully, my response can be summed up with, “Shame on you, GW! You may be a champion of partisan compromise, but you are milk toast at estate tax reform!”

Unfortunately, in politics, telling a half-truth is not a lie. What President Bush and Congress didn't tell you, while they were proclaiming their historic achievement, is the slimy nature of this purported estate tax repeal.

Congress adopted a bill that abolishes estate taxes in 10 years. No doubt they are already promoting their conservative position to business constituents in endeavoring to fill their campaign coffers. However, these statesmen have known all along about the Byrd Amendment. It impacts (like a truck) any changes in the tax code that will take effect 10 years or more into the future.

This parliamentary procedural law states that in order for estate tax repeal to occur, a majority of our senators must vote to readdress the estate tax repeal and sixty senators must again vote for estate tax repeal prior to 2011. If the estate tax repeal is not recalled to the Senate floor, or if sixty senators do not vote to reaffirm the repeal, the estate tax rate reverts to the 55% level that was in effect prior to enactment of the new law.

To clarify the picture for you, President Bush gave every tax-and-spend Democrat an opportunity to vote for estate tax repeal and proclaim his or her conservative support for privately owned businesses, knowing full well that this reform wouldn't have a Republican's chance in Massachusetts to ever be affirmed prior to 2011.

As further evidence of these political shenanigans, consider that the new tax law abolishes the unified gift and estate tax credit and creates a separate estate tax credit and gift tax credit.

Over the next 10 years, the estate tax credit rises to an impressive $3.5 million dollars. On the other hand, in 2002, the gift tax credit jumps to $1 million dollars, but stays there for the full 10-year period.

Appropriately you ask, “Why did Congress make the tax credits more complicated?”

The answer is because good succession planning takes advantage of gift tax credits as soon as possible. A new wave of taxing liberals could take them away. The estate and gift tax credits have been separated because the estate tax repeal was just political whitewash and your congressmen and senators do not want you to take advantage of gifting opportunities, that from the outset, they never intended for you to have.

As you can see from the Rawls Company's Estate Tax Repeal Phase-In Chart, unless you become a member of the “Bring It To An End In 2010 Club,” (the only year of no estate tax), you have little hope for estate tax repeal.


Don Ray is the president of the George B. Jones Companies, a national accounting and consulting group for retail automobile dealers. If you would like to know more about tax issues facing dealers, contact him at 901-684-5643 and donr@gbj.com.

ESTATE TAX REPEAL PHASE IN CHART

Year $ Estate $ Net
Estate Tax
%
Shinkage
% Top
Rate
$ Estate
Exemption
$ Estate
Credit
$ Gift
Exemption
2001 20,000,000 10,515,250 52.58 55 675,000 220,550 675,000
2002 21,000,000 9,795,000 46.64 50 1,000,000 345,800 1,000,000
2003 22,050,000 10,209,500 46.30 49 1,000,000 345,800 1,000,000
2004 23,152,500 10,178,200 43.96 48 1,500,000 555,800 1,000,000
2005 24,310,125 10,605,759 43.63 47 1,500,000 555,800 1,000,000
2006 25,525,631 10,581,790 41.46 46 2,000,000 780,000 1,000,000
2007 26,801,913 11,020,861 41.12 45 2,000,000 780,000 1,000,000
2008 28,142,008 11,623,904 41.30 45 2,000,000 780,800 1,000,000
2009 29,549,109 10,907,099 36.91 45 3,500,000 1,455,800 1,000,000
2010 31,026,564 0 0.00 0 0 0 *1,000,000
2011 32,577,893 17,367,841 53.1 55 1,000,000 345,800 1,000,000
*In 2010 a modified carryover basis rule immediately goes into effect. $1,300,000 of basis will be permitted to begin and $3,000,000 of basis will be permitted to added to assets transferred to a surviving spouse. Gifts of $1,600,000 will be subject to a gift tax equal to the top individual income tax rate at that time.
Source: The Rawls Company.