Sunday, November 30, 1997

Changes in federal estate tax laws to take effect soon

By Richelle Tremaine / Knight-Ridder Newspapers

Are you affected by the 1997 tax law changes? You are if you plan to leave or receive an estate.

The Taxpayer Relief Act of 1997 has been called one of the first significant tax cuts in years, but industry experts say estate-tax relief seems barely to keep up with inflation.

Beginning in 1998, estate tax provisions will be phased in, and the value exempted from estate tax will increase from $600,000 to $1 million in 2006. Although that amount sounds impressive, some question its impact.

"Certainly, if they've moved from $600,000 to $1 million, that's an improvement," said Gregory Bond, a certified public accountant and financial and tax planner for Cornerstone Financial Advisors Inc. in Overland Park, Kan. "But it's a complicated thing they've introduced. There's a lot of people this tax law has implications for."

Bond said that in examining an estate, you must add up all the assets, including life insurance, a home, investments and sometimes a business. Those assets often put middle Americans over the $600,000 mark.

"I feel it's going to be years before we see how these rules are actually implemented and applied to practical cases," Bond said.

Industry professionals say four of the more than 20 changes in the Tax Relief Act of 1997 will have major effect:

--Increasing the unified credit from the exemption equivalent of $600,000 to $1 million. However, the phase-in is considered severely back-loaded.

"I call it back-loaded, because factoring in inflation, really there's little relief for at least seven years, until 2004," said Charlotte Gist, a certified financial planner with Cigna Financial Advisors.

The exemption rate in 2003 is $700,000 and jumps to $850,000 in 2004.

--Estate tax exclusion for qualifying family-owned farms and businesses.

"If you can jump through all the hoops, this exemption is a good one. It takes you up to $1.3 million in exemptions," said Dean Callison, certified financial planner and president of Callison and Advisors in Overland Park.

That amount is reduced by the amount effectively exempted by the unified credit. However, eligibility for this exclusion is strict. The decedent has to have been involved in the business during five of the last eight years. The business interest must represent 50 percent or more of the estate. The business can pass only to qualified heirs. Then the qualified heirs must be actively involved in the business for 10 years following the decedent's death.

Again, this becomes effective for decedents who die in 1998.

--Capital gains tax reduction.

"This lowers the tax rate paid on profits from the sale of long-term stocks from the current 28 percent to 20 percent and creates a new 10 percent capital gains tax rate for taxpayers in the 15 percent tax bracket," Callison said.

--A variety of individual retirement accounts.

"The IRAs bring everyone into it," Bond said.

For example, anyone who has children or is financing education expenses will be affected.

"It's made to sound quite impressive, but with all of these exclusions, how much of this can be implemented to help the people -- we'll have to see," Bond said. "But it is a step in the right direction."

Bond and Callison agreed the new law shouldn't be classified as insignificant.

"Actually, when you're doing this type of work, there are usually many steps which add up to something significant. It's not one thing that's going to magically change your situation, it's incremental steps to save money," Bond said.

The Tax Relief Act of 1997 also features a host of new IRAs. Gist is advising some clients on the Roth IRA, which takes effect in 1998. It allows individuals to make nondeductible contributions of up to $2,000 a year.

"I do suggest they make gifts to their children via this IRA," Gist said. "While it's nondeductible, if it is left in place at least five years and the taxpayer is 59, then the total account balance can be withdrawn tax-free. Of course, there are exclusions."

Those exclusions involve a phase-out for joint filers between $150,000 and $160,000 of adjusted gross income, and $95,000 to $110,000 for single taxpayers.

"This is a great way to make a gift for your child," Gist said. "The younger they are, the greater the effect of this, because it's going to grow tax-free."

Another avenue to explore is the Charitable Remainder Trust.

"I believe there is still a place for this trust," Callison said. "It's still a viable and useful tool for any business owner. Of course, the charitable intent has got to be present. This trust allows the individual to reduce the size of the estate and still preserve an income stream for the rest of their lives."

And many of the professionals said if you don't plan your estate carefully, as much as 25 percent can go to Uncle Sam.

Bond said: "Review the impact of the new laws on that estate plan every two to three years. And review it with a team of professionals -- a planner, CPA and attorney.

"Usually I identify what needs to be done in terms of conceptual estate planning. I explain to them what would happen if you and your wife died tomorrow."

He also recommends that an experienced estate attorney implement the estate plan and suggests reviewing the plan with an experienced planner.

(c) 1997, The Kansas City Star.

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