Tuesday, February 17, 1998

Strategies for avoiding inheritance taxes under fire

By BRIAN BETHEL / Abilene Reporter-News

They say there are only two certainties in life, and when you die you actually get hit with both of them.

Death taxes generally translate to a hefty toll on the fortunes of the deceased, but smart planners have found ways to help families circumvent some of the 55 percent standard hit.

But now, at least three of those common strategies are under fire from the Clinton administration, which proposes cutting back or eliminating them altogether in its recently-released proposed budget.

"There's a significant amount of money at stake here, so it's only natural that the government would develop an interest in acquiring more of it," said Gary A. Morrison, president of Promed Consultants Corporation, which handles estate planning.

"Some of that money is 'sacred,' i.e. passed down from generation to generation. And there's a lot of it."

The Treasury estimates that its proposed changes could raise an additional $1.1 billion over five years.

Republican opposition say that changes in laws that provided some mild relief for families this year should only be a first step.

In 1996, such taxation generated $17 billion for the treasury Ñ about 1 percent of all federal tax collections.

The strategies affected include:

Ñ Family Limited Partnerships: Under current laws, a family can set up special types of partnerships to lighten the load of gift taxes. An example would be a husband and wife contributing property, such as stocks and bonds, to a partnership and then giving their children shares in the partnership.

They would then value each partnership interest at significantly less than a proportionate value of the property itself.

Treasury officials want to eliminate these sorts of discounts, except for active businesses. The proposal would affect transfers made after the date the bill is enacted.

Thus, if you were planning to enact such a partnership, do it quickly.

"This is being a very common option for families, and to eliminate it would have a definite, in some cases severe, impact on the future of estate planning," said Bobby Melson, local accountant with

"In the past, the courts have held that these partnerships are legal and that families should claim these discounts. Now, we see the government trying to overcome those rulings through legislation."

Ñ "The Crummey Rule:" The administration wants to eliminate this ruling, named after a prominent case in the 1960s, which allows tax-free gifts to life insurance trusts or other family trusts.

Contending that the practice is "essentially a legal fiction," the Treasury contends that practice should be overridden, effective for gifts completed after the end of 1998.

Ñ Personal Residence Trusts: A technique that allows people to give away their homes and get a substantial discount on the size of that gift.

Under the present law, a parent or other person could transfer a home to children or other heirs. The parent continues to to live in the house for a specified time, and the transfer is done at a sharply-discounted gift tax cost.

The attractiveness of the procedure is increased by the fact that full value of the home, when actually transferred to heirs, isn't subject to taxation. In addition, any future games in the value of the home pass to the children without gift or estate taxes.

The change would go into effect whenever the proposed budget does.

"We see more of these types of trusts every year, and we advise people if they can to go into these types of programs to do so," Melson said.

Generally, the three affected tax-saving strategies are so esoteric that your average consumer probably wouldn't be affected by them, Morrison said.

"You'd really have to have contact with a specialist before you decided to do any of those things," he said. "I don't know that it would be something you could come up with on your own."

Melson said that the choices are legitimate pathways to reducing tax burden on heirs, and that their alteration or elimination should be opposed.

He said he has already had a few inquiries about the procedures from individuals who want to take advantage of them.

"Overall, I think the death tax situation is very unfair, considering how long and hard many people work for what they own," he said. "Overall, the impact on budget revenue is small. So small that I would argue these taxes could be eliminated completely and the overall revenue difference would not be significant. The government probably wouldn't even notice."

The Wall Street Journal contributed to this article.