Copyright 2000 Times Publishing Company
St.
Petersburg Times
July 01, 2000, Saturday, 0 South Pinellas
Edition
SECTION: BUSINESS; Pg. 1E
LENGTH: 744 words
HEADLINE:
Estate tax repeal plan could hurt wealthy
BYLINE: HELEN HUNTLEY
BODY:
The celebration over possible repeal of the estate tax is turning out
to be premature. Not only does the bill still have to pass the U.S. Senate, but
it also contains a nasty surprise buried in the details: Many wealthy people
could end up trading one tax for another.
The "Death Tax Elimination Act
of 2000," which passed the U.S. House of Representatives in June, calls for
the phaseout of the federal estate tax over the next 10 years. What most people
have not heard is that it also adds a capital gains tax for beneficiaries of
large estates.
Under current law, assets receive a "stepped-up
basis" to the market value when the owner dies. Here is how it works:
Normally, stock bought for $ 10 a share and sold for $ 100 a share triggers a
capital gains tax on the $ 90 in appreciation. But when stock is inherited, the
capital gains tax only applies to the appreciation that occurs after the
shareowner died. If, for example, that stock was worth $ 100 at the owner's
death and $ 110 when the beneficiary sold it, the capital gain tax would apply
only to the additional $ 10 of appreciation. Often property is sold soon after
death and there is no capital gain to tax.
The bill that passed the
House eliminates the step-up in basis for assets of more than $ 1.3-million left
to a non-spouse or of more than $ 3-million left to a spouse. It would go into
effect with estates of people who die in 2010 or later.
The proposed
change in calculation of capital gains has not generated much reaction, possibly
because the effective date is so far in the future. The "Death Tax" bill
may not pass and even if it does, the capital gains provision may be changed
before the time rolls around for it to be implemented.
"Our prediction
is that at least this year, it will not pass," said Mark Luscombe,
principal analyst for CCH Inc., a Riverwoods, Ill., tax research service. "It
might pass the Senate, but it will be vetoed by the president and probably
Congress won't be able to override his veto. But if (George W.) Bush gets in,
next year we might be talking about it again."
He said the last
congressional attempt to do away with the step-up in basis occurred in 1976. The
provision ended up being postponed and then repealed.
"The main problem
is that it creates a need to go back and recreate what the basis should
be," he said. "This creates the possibility you would have to trace back
over a considerable period of time."
Many people have enough trouble
keeping track of how much they paid for investments purchased during their
lifetimes. The step-up in basis allows their heirs a fresh start on the process.
Swapping estate taxes for capital gains would be a good trade-off, said
Clearwater financial planner Raymond Ferrara of ProVise Management Group. Estate
tax rates go up to 55 percent, while the maximum tax on capital gains is 20
percent.
In addition, people would be freed from the time, money and
hassle now involved in trying to avoid or reduce estate taxes, he said.
Ferrara said he thinks the change in rules would lead to better
investment decisions.
"Older clients won't hold large positions or
higher-risk stock with capital gains just to take advantage of step up at death,
as they will hopefully make economic decisions rather than tax ones on their
investments," he said.
But other possible responses to the proposed
changes are more difficult to predict.
Under current law, wealthy people
often create trusts that leave the amount of the estate tax exemption (now $
675,000) to their children and the rest of the estate to their spouses, who pay
no estate tax on the inheritance. With no estate tax to plan for, people could
leave more tax-free to their children, but might actually end up leaving
everything to their spouses.
A change in the law also would eliminate
the incentive people now have to reduce their estates through annual gifts to
their children and others.
Luscombe said some people also are concerned
that people will give less to charity if estate taxes are eliminated. Many
estate-tax reduction strategies involve the creation of charitable trusts.
If the estate tax is eliminated, a lot of lawyers, accountants and
insurance agents would find a reduced need for their services in the long run.
But the short run could be profitable.
"Clients will be in a state of
flux for the next 10 years and may have to redo their legal documents several
times," financial planner Ferrara said.
LOAD-DATE: July 1, 2000
