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Equal Protection

Opponents of gift and estate tax repeal may be taking a big risk — a risk that arises, ironically, in the very Supreme Court decision that assured George W. Bush’s place in the White House.

The court majority in Bush v. Gore found that manual vote recounts ordered by the Florida Supreme Court violated the equal protection clause of the U.S. Constitution, because voters in one part of the state would likely have their ballots evaluated under standards different than those applied elsewhere in Florida.

This seemed, to me, to be a very expansive reading of the equal protection clause. After all, most states use a variety of methods to record and count ballots, and ballots in Florida must almost inevitably be handled differently than ballots in, say, Georgia or Maine. Neither of these facts has previously been seen as a constitutional problem.

Now, consider that the estate tax presently applies to less than 2 percent of the population. After we get done "reforming" it as repeal opponents advocate, it will apply to even fewer Americans. By design, the tax is meant to affect only a small minority of citizens who do something almost everyone does, which is to transfer property to their heirs.

Would this Supreme Court — or a future court that may include one or more George W. Bush appointees — find the estate tax unconstitutional because most people have no prospect of ever paying it? I think it might, and not necessarily only on equal protection grounds. The Constitution prohibits direct taxes that are not apportioned according to population, except for taxes on income. For this reason, the estate and gift taxes are technically taxes on the privilege of transferring property rather than on the property itself.

Because we are all going to die, all property must eventually be transferred across generations. A Supreme Court might eventually find this to be an unconstitutional direct tax.

Most repeal opponents argue that eliminating wealth transfer taxes would give a windfall to the wealthy. If this is true, then surely they would want some other change in the tax law to compensate for repeal. The most logical quid pro quo would be to limit the amount of unrealized capital gains on which taxes are forgiven at death.

Repeal through the legislative process would allow for this kind of trade-off. But if the transfer taxes are struck down in the courts, wealthy citizens will benefit without having to make any sacrifice in return.

Some of my clients’ estates are subject to multi-million-dollar taxes. When the time comes, I am going to advise the executors to consult counsel about whether a constitutional challenge might be worthwhile. I would not want to be in the shoes of an attorney who handled a large estate without raising this issue, only to have the tax struck down after the period for claiming a refund has lapsed.

For more on this topic, click on these related articles from the April issue of Sentinel:

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.