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Planning for Estate Tax Repeal

How Will the Repeal of Federal Estate, Gift, and Generation Skipping Taxes Affect...

Estate and Tax Planning?

Should the estate, gift, and generation skipping taxes be repealed, estate planning will change dramatically; so much so, in fact, that you will want to have your present estate plan thoroughly reviewed. We'll still be concerned with avoiding probate (revocable trusts will still be the planning tool of choice in California), but estate tax avoidance will be a thing of the past. Without all the tax "gobbledygook," many estate planning documents will become more readily understood by the persons who are signing them. Others will feel free (perhaps even have the urge) to provide new complexities in their documents for such things as "forfeiture on re-marriage," something that our current estate tax law penalizes by disallowing the marital deduction. (Perhaps this will lead to the "living together agreement" replacing marriage vows for some wealthy widows and widowers.) For some there will be less incentive to leave wealth to charity, and greater incentive to create multi-generational "family dynasties." Numerous other incentives built into the present estate tax system will tossed out with the rest of the system.

Far more emphasis would be placed upon capital gains planning. Gone are the days of the "step up in basis" on death (with exceptions similar to those currently permitted under the "unified credit"). More emphasis will be placed on record-keeping, for donees of gifts and beneficiaries of estates and trusts will have "carry over basis" with which to contend. There will likely be limited amounts of basis step-up permitted, and it will become even more important to plan for which assets to keep and which assets to give away. (Lifetime gifts have never received a basis "step up.") Giving away low basis assets to charity and to lower-tax-bracket beneficiaries will remain as an important planning technique. Tax-deferred exchanges (under Section 1031 of the Internal Revenue Code) will continue to be high on the tax planner's agenda, delaying the impact of taxes well into the future for many individuals and their families.

For the immediate future following the repeal of the estate and gift tax, estate planners will be very, very busy with amendments to existing plans. Since most tax bills are "phased in" over a term of years, estate planning will be more of a guessing game than ever before. Will the repeal stay on track, or will the estate tax be re-instated (perhaps with even greater bite)? What about capital gains? Will the preferential rate for capital gains be abolished (as it was only a few years ago)? Will I live to see the day that the estate tax is no longer part of our tax code?

Non-tax aspects of estate planning will continue to be important. Who gets what assets and when? If I am unable to make health care, personal care, or financial management decisions for myself, who will do those things for me? Are there beneficiaries with "special needs," and how should these beneficiaries be treated? Are there marital, premarital, or living-together issues that need to be discussed?  [Discussion continued....]