Elimination of Estate Tax By now, you may have read about Congresses proposed elimination of the Estate tax. What is it and how does it apply to you will be the purpose of this article. Most taxpayers don’t realize that we get taxed twice in our lives on the same earnings! First, we pay federal income tax on our earnings and when we die we are subject to the Federal Estate tax on the assets included in our estate. It has been estimated that pensions and IRAs that are unused by you at death will be subject to a whopping 87% rate on these unused pensions because both taxes hit an once!  The arguments for eliminating the tax are very clear. It is very unfair to be effectively taxed twice on the same funds. Secondly, for people who don’t have liquid assets in their estates such as those with lots of real estate or family farms, it could resort to liquidating the farm or business in order to pay the tax. Interestingly, it isn’t that hard to avoid the tax anyway since there is a $675,000 lifetime exemption in the year 2000. In addition, you can make annual gifts of $10,000 per person if you are single and $20,000 per person per year if married. Example: Mary is a single mom who has three children. She can give away up to $10,000 to each of her kids each year with no gift or estate tax. Strategy: Set up an irrevocable life insurance trust. The $675,000 exemption may seem like a lot but it isn’t because it includes your life insurance if you are the owner and includes all pensions and homes in your name. However, much of this can also be avoided with proper planning. With life insurance, it should usually be owned by an irrevocable (non-cancelable) trust. This would not only keep the insurance out of your estate for estate tax purposes, but it will also avoid probate. Thus, you might wonder why President Clinton will probably veto the elimination of the tax. There actually are some very good economic reasons for the veto. First, the estate tax is paid, for the most part, by the wealthy. Eliminating it may result in income tax increases in the future since the rich will now not have to pay it. However, the main reason for not eliminating the tax is that the estate tax is our “great equalizer.” It prevents super rich families from dominating the economic landscape of America. It helps prevent a few families from taking over most of the wealth (real estate and stock) in America. Arguably, it has helped create a rich strong middle class. The Democrats argue that if you want to prevent small businesses and family farms from having to be sold to pay the tax, just raise the exemption. This would exempt out all but the very wealthy. Eliminating the tax definitely benefits the very rich more than any other group. Although the tax is expected to be vetoed by the president, you can expect a major battle next year with the new congress and new president. We will all find developments in this area very interesting.