Trust Company of Vermont Spring 2001 Article

In our household, I take pride in my ability to predict movie plots. Or so I think. I can only recall three movies where I was caught by surprise: "The Sixth Sense", "The Crying Game", and "Body Heat". Now "Body Heat", Lawrence Kasdan's 1981 film noir, starring Kathleen Turner, as the protagonist going after her husband's inheritance, and William Hurt, as an unsuspecting lawyer, was interesting in that at least I had a head start in guessing the plot which revolved around the lawyer's failure to understand the Rule Against Perpetuities, an estate planner's nightmare. (See Estate Planning and Body Heat, by Michael Asimow of UCLA Law School)

The so-called "repeal of the estate tax", and its intricacies, were it a film, would have to be added to this list. I am still trying to sort out the plots and subplots. This I know...the estate tax was repealed. To be sure, its demise will only last one year, 2010. In the year 2011, the estate tax will simply spring back to life unless Congress and the President extend the repeal. The odds are not in favor that this will happen. We'll probably have to have both houses and the Presidency controlled by the Republicans, the ability to absorb the loss of about 55 billion a year in lost tax revenue, and resolved the funding for Social Security and Medicare at a time when the baby boomers are starting to look old. The odds are so great against extension that some proponents of repeal are not claiming victory.

Plot twist #1 - a one year repeal.
Or perhaps it will never make it through the five changes in Congress so even one year may be doubtful.

Plot twist #2 - States pay 25% of the cost of the repeal and they didn't even vote.
As you can see by the chart, the exemption does increase, but there isn't a significant drop in the tax rates. If you were able to look further, you might see a subplot. In the year 2006, when the exemption reaches 2 million, the states will no longer get their share. The credit allowed the states abruptly stops, thus diverting their share to the federal government. The National Governor's Association estimates the states will lose 36.5 billion, which will go to the feds to help defray the cost of the repeal. Now that is a clever plot twist, but what will the states do? Pass new state estate and inheritance taxes?

Year of Death	Exemption Amount	Maximum Tax Rate
2001	$675,000	55%
2002	$1,000,000	50%
2003	$1,000,000	49%
2004	$1,500,000	48%
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	0%	0%
2011	$1,000,000	55%

Plot twist # 3 - Carryover basis returns.
Now following the year 2010, the estate tax revenues stop. This will be sizable if only for one year. That's when the new law designed to increase revenues from capital gains will go into effect. Under existing law, assets owned at death generally will get a new basis, which will effectively preclude taxation of all prior appreciation. This step-up in basis will be eliminated, except that $1,300,000 in transfers to non-spousal beneficiaries and $4,300,000 in transfers to the surviving spouse would receive a step-up in basis. Transfers in excess of these amounts would have a carry-over basis. Estate Planners, who for the most part sat on the sidelines while the repeal was being debated, have sprung back to life with gusto. The reappearance of carry over basis (yes, for a brief period in the 70's we tried carry over basis but it collapsed due to the sheer weight of the administrative costs to the taxpayer) will create wonderful opportunities for incomprehensible planning.

Plot twist # 4 - Gift taxes not repealed
If they truly meant to repeal the estate tax, why didn't they repeal the gift tax? Granted, starting in 2002 a new $1,000,000 lifetime exclusion from the gift tax will be allowed per person , and the tax rate will be the same as the highest income tax rate in effect at the time the gift is made after 2009, which will be 35 percent.

So the plot thickens. Who knows, they may make a few movies out of this. How about "Nonsense", "The Crying Game" (why waste a good title) and "Body Heat II"? I have already started a script for "Body Heat II". I don't want to give away the plot but this much I can tell you, the Kathleen Turner character has become immensely wealthy while in hiding and her children find her in the Turks and Caicos in the year 2010.