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Author: libc Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: AN ESTATE TAX HYPOTHETICAL Date: 9/10/2000 8:35 AM
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An Estate Tax Hypothetical Versus Immmediate Tax Relief

The U.S. House of Representatives passed Bill HR-8 on 6-9-2000 and the Senate on 7-14-2000 and President Clinton vetoed it on 8-31-2000 and the House was unable to override his veto on 9-7-2000. It provides for a total elimination of the federal estate tax over a period of time.

Having studied the provisions of HR-8 I am convinced of the following:

· Complete estate tax elimination is not until 10 years. If enacted at a later date are you satisfied that within 10 years it will not be taken away?

· If enacted the estate and gift tax rates will be reduced over a 10 year time period. However, they will still range between 50 and 40 percent. Do you consider 50 to 40 percent substantial or insignificant?

· If enacted the unified credit is replaced with a unified exemption. Ask your tax adviser for an explanation.

· At the end of 10 years when the estate tax is totally eliminated a modified income tax carryover basis at death replaces the current "stepped up in basis" except for $1.3 million and $3 million to surviving spouses. The alteration in the income tax stepped-up-in-basis is what will pay for death tax elimination.

It is important to keep the provisions of HR-8 in mind because the subject of estate tax change is far from over.

Here are nuts-and-bolts recommendations that will benefit millions of Americans including small business and farm owners. These topics are not being given to you as "sound bites." A detailed explanation is provided.

The best tax legislation for millions of Americans is: (1) a federal estate tax exemption for all qualified retirement plans, (2) an increase in the federal estate & gift unified tax credit, and (3) a retention of the federal income stepped-up-in-basis income tax process.

Item 1...The time has come to reinstate this valuable benefit. In 1982 this valuable tax benefit was reduced to $100,000, and eliminated entirely by the Tax Reform Act of 1984 for all qualified retirement plans. An estate tax exemption for qualified retirement plans will contribute a financial answer to the social security retirement problem. The monetary solution is the providing of more money for family members through the elimination of the "double whammy tax" (estate and income taxes). Here is an example of the "double whammy" tax.

1. The gross value of $108.18 ($1 contributed on a tax-deductible or before-tax basis [earnings tax-deferred] each year for 25 years at 10 percent) is subject to federal income tax when distributed…not $25.

2. The gross value of $108.18…not $25 is also subject to the federal estate tax. The above is called the "double whammy tax." It is unfair, capricious, and subject to bad judgment by Congress.

Item 2...The federal estate & gift tax unified credit is presently $220,550 with an eventual increase to $345,800 in year 2006. These amounts translate to taxable estates and gifts of $675,000 and $1,000,000.
With proper tax planning (the utilization of a credit-shelter by-pass trust} married people can double these amounts.

The unified credit should be increased to $5,000,000 per person and $10,000,000 per couple.

Item 3...HR-8 endorses the total elimination of the federal estate tax over a period of time. However, it also sanctions a provision that modifies the stepped-up-in-basis (income tax procedure) at the point in time when the entire estate tax is eliminated.

What is stepped-up-in basis regarding the federal income tax on property inherited by reason of death?

Property inherited by reason of death receives a stepped-up-in-basis status, this means that if you inherit property with a fair market value of $1, your basis (your cost) is $1 not the original purchase price.

If you sell the inherited property for $1, there is no tax to be paid.

Many financial commentators believe that the stepped-up-in-basis federal income tax procedure is more beneficial than federal estate tax exclusion.

It will take a tax expert to explain the advantage in changing the stepped-up-in-basis rules as a necessary modification in order to eliminate the estate tax.

HR-8 is politics at its least effective. It does not contain common-sense endorsements. And equally as important it provides only a ten-year promise…not immediate tax relief for all Americans.

The complete elimination of the federal estate tax is not a societal benefit. Its removal will affect charitable institutions and a reduction in expenditures to fund programs for various community groups. One suggestion is that the revenue can be used to fund prescription (Rx) medications through Medicare.

Conclusion...it will take statesman-like people to provide an enactment of a federal estate tax exemption for all qualified retirement plans, an increase in the federal estate & gift unified tax credit, and a retention of the federal income stepped-up-in-basis income tax process.

This is immediate death tax reform…which must stay on the books and not to be taken away in the future as it affects millions of Americans including small business and farm owners.

_______________________________________________________

William D. Brownlie, CLU, ChFC, CIP, LIA a Westford, Massachusetts resident is a licensed life insurance adviser. His third published book Life Insurance Buyer's Guide - Second Edition 2000 is now in print.
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