WASHINGTON – People hoping to leave estates to their heirs have a dilemma under the new tax law: Live until 2010, benefit from repeal of the estate tax; live longer, the tax returns like a ghost from the past.
"You may not live long enough to see it, but if you live too long you won't get it either," said Sen. Dick Durbin, D-Ill.
Under the law just signed by President Bush, estate tax exemptions will rise gradually while the rates go down. Repeals comes at the dawn of 2010.
Congress passed the tax bill under budget rules that require an expiration or "sunset" date, so the estate tax will return just 12 months later unless the repeal is made permanent by a future law.
The estate of a person who dies during 2010, therefore, will not be subject to any estate tax. A year later, the tax of up to 55 percent will apply once again and the exemptions will be much lower.
"Tax advisers are going to need crystal balls to know when their clients are going to die," said Jon Gallo, an estate planning attorney in Los Angeles.
It is not all clear sailing for estates in the repeal year of 2010 because a complex new system of capital gains taxation automatically goes into place. Under this system -- tried and abandoned in the 1970s as unworkable -- the gain on inherited assets sold by heirs is measured from the date the assets were acquired by the person who died.
Current law calculates that gain based on the date the asset was inherited. The bottom line: An heir in 2010 could face a much bigger capital gains tax bill than under current law.
These changes are likely to have a widespread effect on wills, trusts and other estate planning activity. People will have to decide if they believe Congress eventually will make the repeal permanent or if the estate tax will be resurrected in a decade's time.
"Not only will many estate plans have to be re-examined and rewritten, but some of the basic principles that have guided estate planning will be stood on their heads," said Bruno Graziano, senior estate tax analyst at CCH Inc., an Illinois-based publisher of tax information.
There are other complications. For example, the gift tax is to remain in place when the estate tax disappears, which reduces the current tax advantage of giving away assets that might appreciate during one's lifetime.
"Why would you want to pay a gift tax if no tax would be due after your death, assuming you survive until repeal becomes a reality?" Graziano said.
Still, the vast majority of estates will not have to wrestle with these questions, particularly because the law raises the current $675,000 per-person exemption to $1 million in 2002 and eventually to $3.5 million in 2009. On average, only about 2 percent of all estates are subject to the tax every year, and that figure is certain to drop with the higher exemptions.
Opponents of the repeal say that as budget pressures grow, a future Congress could opt to keep the tax along with the higher exemptions. That would keep tens of billions of dollars in estate taxes flowing to the federal government just as programs such as Social Security and Medicare face added strain due to retirements of the big baby boom generation.
"The decision to postpone its execution for nine years gives common sense plenty of time to prevail over the hazards of wholesale repeal," said Chuck Collins, co-founder of Responsible Wealth, a group of wealthy individuals who are crusading to keep the tax.
An additional factor that could lead members of Congress to rethink the repeal involves states. They could lose between $50 billion and $100 billion over the next 10 years in money they now gain from the estate tax, according to the National Governors Association. The new law actually phases out the states' share faster than it repeals the tax.
Yet there are just as many pressures to keep the repeal, particularly among Republicans, and business and farm groups that have campaigned against it for years.
Former Rep. Bill Archer, a Republican who was chairman of the tax-writing House Ways and Means Committee from 1995-2000, said it will be difficult for a future Congress to reverse course on repealing the estate tax.
"The expectations would be there. All of the estate planning would be done," Archer said. "It would be a tax increase, which creates a barrier that's got to be overcome."
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