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Retirement > 401(k)s & IRAs
IRAs and estate tax repeal
June 21, 2000: 9:06 a.m. ET

House-passed bill doesn't mean holders can avoid account planning
By Ed Slott
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NEW YORK (CNNfn) - The U.S. House of Representatives overwhelmingly passed a bill recently that would phase out and then eventually repeal the estate tax. The complete repeal would not occur until 2010. What does this mean for IRA owners?

Does no more estate tax mean no more IRA planning? No!

It's true that estate taxes can consume IRAs, but even without the estate tax, IRA planning must not be neglected. IRAs are still laden with income tax.

graphicYou still must plan properly to maximize the tax benefits of IRAs and make sure that IRA money stays income tax-deferred for as long as possible. Don't be lulled into the fantasy that IRAs will get a free ride.

Don't use possible estate tax repeal as an excuse to further procrastinate or put off your IRA planning altogether. An IRA can still be lost in the year after the IRA owner dies -- even without estate taxes. Also, don't believe that the estate tax will just go away.

First, a few words about the estate tax repeal bill.

The bill, approved June 9, has little chance of passage as is -- especially once people read it. The first phase. which would be effective in 2001, wipes out the top 55 percent rate and the 5 percent surtax. That sounds great, but it won't help most people. The surtax for example only affects those with estates valued at more than $10 million. Therefore, the first group to benefit would be the super-rich.

From there, it eventually gets down to the small businesses and farms that are the poster children for estate tax repeal. The bottom line is that this bill is mainly to give Bill Gates and his pals a handout, a huge handout.

Once people realize that our tax dollars are being skimmed in an effort to save zillionaires from estate taxes, then passage as law will be less likely. This may be the biggest scam since the savings and loan debacle, which in similar fashion benefited the wealthiest people in the country at the expense of the taxpayers. In fact, this may be bigger, because it will be legal.

I think -- or, at least, hope -- that working people will realize what is going on here and voice their outrage. If they don't figure it out, they deserve what they get.

Anyway, because of the spin on this bill (that it helps all of us) as opposed to the reality (that it only benefits the super-rich campaign contributors), there is always a chance that the public will buy it and it could pass. But that's still a long way off.

Since the chances of outright repeal are not likely, you must continue your IRA planning with the laws as we know them today. Even if this bill did pass as is, the estate tax for lower estates would not be repealed for ten years. Because of the bill's 10-year phase-out method of dropping rates, the estates that need relief will be the last to ever see it. The tax breaks begin at the highest levels -- the largest estates -- and work their way down to lower valued estates.

During that 10-year period the tax law could be changed 10 more times. In fact, there has rarely been a tax law that contained annual phase-in or phase-out provisions over many years that has actually gone the distance without being amended or repealed along the way. That is probably the fate of this bill if it ever gets to law. Also, you, the IRA owner, could die waiting for the estate tax to go away.

There are other issues that may affect your IRA if the estate tax was repealed. What about state estate taxes? Many states over the years have effectively done away with the estate tax because they receive a sort of kickback from the federal estate tax in the form of a "credit for state death taxes."

In other words, even states that say they have no estate tax receive estate tax money. The money they receive is the amount of the credit for state death taxes on the federal estate tax return. That credit can go as high as 16 percent of the federal estate tax, in the largest estates.

Under this bill, the states would lose all that money. It is likely then, that states would immediately upon passage of any federal estate tax repeal pass their own state estate tax.

That would mean more tax on your IRA.

The bottom line on this issue is don't sit around waiting for estate tax repeal that will likely not happen or not affect you, unless you are super-duper rich. Continue to protect your IRA. It's even more important than ever because you may end up paying for this estate tax break somewhere else. After all, somebody has to help support the wealthy. That's the way I see it.

Do you disagree? Do you agree? I'd love to hear your views on this heated issue. You can email me at slottcpa@aol.com. In an upcoming CNNfn column I'll share your views with all our readers. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.