CONGRESS REPEALS DEATH TAX(?)--PART III
(7/1/01)

Okay, I know you are getting tired of me belaboring and belittling the recently enacted Economic Growth and Tax Relief Reconciliation Act of 2001 (the Tax Relief Act). I apologize but really, I'm not the one you should be blaming. Remember, this was a scheme cooked up by the President and Congress. And it's a doozy. If you don't think so, just read on.

I concluded my last column by telling you about the different treatments accorded to property acquired by gift and that inherited at death. Why this distinction makes any sense is beyond me, but there it is.

Let's pick up where we left off. The gift tax on transfers exceeding the annual exclusion of $10,000 per person, plus the $1 million maximum lifetime exemption, will be equal to the federal estate tax rates through 2009. Thereafter, it will equal the top individual income tax rate.

What this means is that fewer and fewer people, especially those with large estates, will be making gifts. Instead, they will wait until they die to transfer their property to their children. This could have a negative effect on business transition planning for the family owned business, which is the group this tax law is supposedly targeted to help. Hmm, what's wrong with this plan?

Enough about Gift Tax, what this Generation Skipping Tax I've heard about?

Someone's a real glutton for punishment. Okay, let's start by defining this creature known as the Generation Skipping Transfer Tax (or GST). This is a tax imposed on transfers to "skip person" two or more generations below the transferor. Huh? That's what I said, too. The idea is that it's okay to set up a trust that will distribute money to your spouse and children, but if you try to distribute it directly to your grandchildren, you're somehow trying to cheat Uncle Sam and you ought to be taxed--and heavily. I know that's about as clear as mud, but if you're really interested in this topic, you're either a glutton for punishment or you need to sit down with an estate planning professional. There's no way I'm going to be able to help you make heads nor tails out of it in a few short paragraphs.

Now, having said that, what happens to the GST under the Act? Well, through 2003, the GST inflation increases will continue to apply to the GST exemption. It is currently $1,060,000 - or more than the $1,000,000 exemption equivalent that will come into effect for 2002 and 2003.

For 2004 through 2010, the GST exemption will be equal to the federal estate tax exemption equivalent. For those of you who care, this will eliminate the need for reverse QTIP trusts--and no, I'm not going to try to explain reverse QTIP trusts today. That will be the topic for another column.

Now that I'm thoroughly confused, how about trying to explain this Sunset Provision again?

I was hoping you wouldn't ask that question. Oh well, here goes nothing. If you have read the sunset provisions (all two of you), I'm sure you'll agree with that famous old saying that "there are two things you don't want to see made - sausage and law." The proof is in the sunset provisions.

These provisions were inserted into the law for one reason only. Congress was trying to get around the ''Byrd Rule", which requires 60 votes in the Senate before a law can alter revenue beyond a 10-year period. By sticking in the sunset provisions, the law expires within 10 years and Congress avoided having to find 60 votes for its passage. Smart, huh? The only problem is that no one knows what to do with the law now or in the future. Do you plan your estate with the assumption the law will revert back to the old pre-2001 law or do you assume Congress will step up to the plate again and enact another law extending the repeal of the estate tax? The answer depends on how much or little you are willing to gamble.

In actuality, no one has a crystal ball and we can't predict what a future Congress and President will do. Politics, economics, market developments, military conflicts, public opinion, the party in power, all play a role in the every day life of the government and no one can say with any degree of certitude what America will look like in 2011.

The bottom line--the almighty dollar--drives the law. Aging baby boomers, Generation Xers, and the kids coming up behind will all have their say in how their taxes are budgeted and whether the government will spend more money or less on social security and related plans.

Having said this, there may be cause for optimism. So far, Congress has never left a law untinkered with for its entire duration. The last tax reform was to have lasted until 2006. You see how far it got--5 years or halfway through its life. The likelihood is that a future Congress, perhaps as early as 2006, will step in to add some certainty to the law and by extension, to the estate planning process.

Okay Shiles, that's enough hand-wringing. How do we plan under the Tax Relief Act of 2001?

All right, there are things, in my opinion, that you can do to alleviate some of the uncertainty. First, you can build maximum flexibility into your revocable trusts. That could mean establishing a credit shelter trust with a right of disclaimer. It will provide flexibility because the beneficiary can change your estate plan after your death.

In Oklahoma, you can disclaim an interest even if the trust is silent on the right of disclaimer. The problem there, though, is that the disclaimed property will be distributed as if the disclaimant predeceased the decedent. It is better if you spell out in the trust or will exactly what happens if property is disclaimed. For example, you may want your wife to be able to disclaim property which then will go to your credit shelter trust. The income and possibly some or all of the principal of this disclaimed property will be accessible to your wife, but she won't own it and it won't be included in her taxable estate at her death.

If you provide for a disclaimer in your credit shelter trust to be available and it's not needed because the estate tax truly is repealed, your wife just doesn't execute it. If the estate tax comes back in 2011 or later, she disclaims to the trust, sits back, and reaps th