Will the Death Tax Buy the Farm?

• Author: McCRARY, DEANNA
• Position: Estate tax reform

FOR MORE AND MORE people today, dying seems to be a bad idea. This is particularly true for the growing number of Americans who are discovering that their demise could bury their estate under a heavy tax burden of 37 percent to 55 percent.

What once was considered a non-issue to the majority of taxpayers, due to its focus on a tiny subset of upper echelon society, is now a startling reality for many. This change is felt acutely in California, where merely owning a home for 20 years can put one squarely within the tax bracket of the elite--at least upon death. Politicians have taken note of these trends and are sounding the trumpet of reform.

"In the beginning, no one thought that the estate tax ever would be repealed because it is a tax that only can be applied to very few people and it is viewed as accomplishing good social goals," explains Michael Allmon, a Marina Del Rey-based CPA and chair of CalCPA's newly-formed Estate Planning Committee. "Estate tax prohibits dynasties and family monopolies, and spreads the wealth of the very wealthy. But now, because a good job wasn't done with indexing estate tax exemptions for inflation, more people are subject to the estate tax than ever."

A POLITICAL ISSUE

The debate over the estate tax, which some have dubbed the "death tax," heated up dramatically in the past year. Traditionally, Republicans have supported repeal of federal laws governing taxes on estates, gifts and trust funds, and Democrats have supported the status quo. This is changing as each groups' constituency becomes more wealthy due to factors such as real estate appreciation, increased savings for retirement, and the phenomena of IPO and stock market millionaires, not to mention the baby boomers, who soon will be staking claims to trillions of dollars in inheritances.

Recently, Democratic presidential hopeful Al Gore changed his position to support targeted relief for small-business owners and family farmers, the "poster children" of estate tax reform, while his Republican rival, George W. Bush, supports outright repeal of all estate taxes. No matter what happens, estate tax reform will surely be a hot issue in the November elections.

STEP-UP VS. CARRYOVER

Under the current laws, estates worth more than $675,000 (going up to $1 million in 2006) are subject to estate taxes, starting at 37 percent. Suggested reforms that seek to abolish estate tax, include recommendations to eliminate stepped-up basis when selling inherited assets and...