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MONEY SAVVY WEEKEND | Money Talk

Estate Tax Repeal May Cut Some Benefits Too

June 23, 2000|LIZ PULLIAM WESTON

Current estate tax law encourages wealthier people to reduce the size of their estates by making gifts while they're alive, because estates worth more than $675,000 now face estate tax rates that start at 37% and climb to 55% for estates worth more than $3 million. (The size of estates that escape tax is scheduled to rise under current law to $1 million by 2006.)

That's why many people take advantage of provisions that allow anyone to give away $10,000 per recipient per year without triggering gift taxes.

A repeal of the estate tax would reduce the perceived necessity of such giving.

With repeal, charities might see fewer huge bequests, as well. Currently, any money given to charity at death escapes all estate taxes. With no estate taxes, the motivation for big bequests may decline. Taxpayers could still receive an income tax break for assets given away during life, of course, but estate planners say many people are reluctant to let go of money or property because they're concerned they will need it before they die.

"We get a lot of clients to consider it [charitable giving at death] because they see the tax benefit they get," said Jeffrey Zabner, an estate planning attorney in Westlake Village. "If that's taken away, they won't do it."

Finally, retirement accounts could begin to play an even greater role in estate planning. Without estate taxes, more money could potentially be passed to heirs, particularly via Roth IRAs, which offer the distinct advantage of withdrawals that are free from income taxes.

What estate-tax changes aren't likely to do is reduce most people's need for estate planning. Californians would still need living trusts to avoid probate costs, and nearly everyone should have plans for dealing with illness and incapacity.

In addition, wealthier people would continue to want trusts to control the flow of money to heirs. And many people would simply need help making the tough decisions about whether and when to give away assets during life.

"I don't think estate planning attorneys will be out of a job," Zabner said. "In fact, we may be busier than ever."

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. She can be reached at liz.pulliam@latimes.com.

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Who's Paying

Internal Revenue Service figures show 42,901 estates paid estate taxes in 1997--the latest yearfor which figures are available. That represents about 2% of the taxpayers who died that year. Nearly half of the $16.7 billion in estate taxes paid came from the 5% of estates worth more than $5 million.Source: Internal Revenue Service

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