Estate and gift tax legislation - oh what a relief it is?

• Author: Nager, Ross W.
• Position: Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997, signed into law on Aug. 5, 1997, offers family businesses estate tax relief, along with mind-numbing complexity and political fanfare.

The first two columns of the table on page 685 show the scheduled increases for the girt and estate tax exemption. The increases are heavily "back-ended," meaning that taxpayers will have to wait until later for most of the relief. The exemption tops out at $1 million in 2006 and is not indexed for inflation. Because the exemption offsets the estate tax at the lowest brackets, the $400,000 increase translates into no more than a $153,000 estate tax savings (which can be doubled for married couples).

The current $600,000 exemption came into existence in 1986; increasing the exemption to $1 million 20 years later puts a taxpayer about even if his estate grows at 2.6% per year over this period. If investment performance (including inflation) is better, the government comes out ahead.

The keys to maximizing this exemption have not changed. First, it should be used as early as possible. Doing so means that a taxpayer's family will save transfer taxes on post-gift income and appreciation. The potential $220,000 savings increases dramatically if the years of appreciation can be shifted to the taxpayer's children or grandchildren. If circumstances permit, the incremental amount should be gifted as the exemption phases up. Second, a married taxpayer should scrutinize his and his spouse's wills to make sure they are properly worded to use any exemption remaining at death.

Family Business Exclusion

The big news is the new "family owned business exclusion The maximum exclusion is $1.3 million minus the gift and estate exemption. The table's third column shows how the family business exclusion declines as the $600,000 exemption increases.

The new exclusion is available only at death for people who die after 1997. For taxpayers who die in 1998 and are in the 55% estate tax bracket, the potential savings is $371,250; for those who live until 2006, the maximum savings drops to $165,000.

A spouse's estate also can qualify for the exclusion, potentially doubling the savings. However, the spouse must own enough stock (either outright or through a qualified terminable interest property marital deduction trust) to meet the percentage tests discussed below. If the spouse does not own stock, and dies before the taxpayer, the Spouse's exclusion is lost. For families that prohibit or discourage...