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Estate Tax Debate Pits Reform Against Repeal

With the tax-cut contest finally underway in earnest, some of the key players are trying to influence the game while hiding in the dugout.

Most Democrats and Republicans make no bones about where they stand on President Bush's proposed $1.6 trillion in tax reductions. Democrats object that the program is too big and too tilted toward the wealthy, especially in its proposed phase-out of gift and estate taxes. Republicans argue that, if anything, the Bush program is too modest in the face of ever-rosier predictions of federal surplus.

But things are not so simple for folks who stand to lose big dollars if the estate tax goes away. Lawyers, insurance companies and their agents, charities and accountants find themselves in a bind. If they argue against repeal, they risk upsetting the very clients and donors upon whose largesse they depend. If they endorse repeal or even keep silent, they fear they may be putting themselves out of work.

What to do? The favored game plan so far is to push for "reform" of the wealth transfer taxes, rather than repeal - and, for the most part, to do so in as low-profile a manner as possible, to avoid angering the customers.

As George W. Bush clung to his slender lead in the weeks following the presidential election, the Association for Advanced Life Underwriting advised its members that "the prospects for estate tax repeal are appreciably enhanced."

"Basic precautionary instincts would direct that we operate in this new political world with the utmost care," the organization wrote in a "special bulletin" from Washington on November 30. "AALU is convinced that a well crafted estate tax reform, which provides immediate and substantial relief from the excessive burdens of that tax, must be the goal of our efforts. It is, therefore, essential that AALU, in fulfilling its responsibilities to its members and to the clientele which they serve, adopt a firm and effective position in the national debate which could easily culminate in estate tax legislation."

The AALU's membership mainly consists of successful life insurance agents. The organization says its mission is "to monitor, develop, and present legislation and regulation in the areas of advanced life underwriting, so as to serve the best interests of its members and the general public." In this case, of course, the best interests of its members may not be the same as those of the general public, though the organization and other opponents of outright repeal certainly would argue otherwise.

LIMRA International, a research organization whose members are primarily insurance companies, estimated last year that estate tax repeal could eliminate up to $1 billion in annual premiums for survivorship, or "second-to-die," life insurance that is designed primarily to pay that tax. Although the organization noted that the real-world effects probably would not be that severe because some of that product is sold today for other reasons, the companies and their agents obviously have good reason to be concerned.

From the estate planners' perspective, reforms that would liberalize the gift and estate taxes without repealing them would be good for everybody. Clients would pay less tax, and planners would have even more opportunity than today to help them do it. Speaking from experience, it is both fun and profitable to tell someone how to save hundreds of thousands of dollars, or more, in taxes.

At this year's Philip E. Heckerling Institute on Estate Planning, the nation's leading conference for estate planning professionals, the case for reform over repeal was forcefully argued by attorney Jonathan Blattmachr and Hofstra University Law Professor Mitchell Gans. In a paper presented by Blattmachr, who is one of the profession's best-known practitioners, they argued that repeal would not only greatly reduce the federal tax burden on the wealthy, but also would financially devastate charitable giving and state tax revenues. Charities would lose tax-motivated gifts and bequests, and states would lose not only their own estate tax revenues (which are mostly underwritten by a credit against the federal tax), but also income taxes as taxpayers shift income-generating assets to relatives or trusts in low- or no-tax states.

Agree with them or not, at least Blattmachr and Gans have put their position on the record. Not so, at least at this writing, for the American Bar Association, the American Institute of Certified Public Accountants, or the Council on Foundations. They have not taken a public stand, though it is likely that many of their members and perhaps the organizations' leaders are doing what they can to avert repeal.

Charities have perhaps the biggest stake in the estate tax debate, but also the most reason to keep a low profile. A recent report by the Council on Foundations cites 1995 statistics showing that charities received $8.7 billion in bequests that year from estates with a total value of about $112 billion.

No matter what happens in Washington this year, the issue is not going to go away. If a phase-out of the gift and estate tax is enacted, we can expect repeated efforts over the years ahead to halt the process and keep some portion of the tax alive. If "reform" is approved, opponents of the tax will come back to reform it again and again, until it goes away.

Even then, it may not all be over. Congress repealed earlier taxes on estates in 1802, 1870 and 1902. The gift tax was scrapped in 1926, just two years after it was first enacted. But these taxes always came back.

Maybe we should stop using the terms estate taxes or gift taxes or wealth transfer taxes or death taxes. Maybe we should just call this the Lazarus tax.

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 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."

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