Island Lawyers Weigh in on Estate Tax Repeal

Long Island Business News
By: Stuart Markus
May 18, 2001

As the U.S. Senate Finance Committee was about to begin marking up legislation to end the estate tax, lawyers from Long Island were flying to Washington to try to correct flaws that they said would impose an even more onerous tax than the one being repealed.

The House of Representatives has already passed a version of the controversial bill. The Senate is expected to pass its version this month. A House-Senate conference committee would reconcile differences between the two.

"The way the House was trying to deal with the problem ... could have caused a new death tax to replace the old one," said Lewis S. Meltzer, a principal in Mineola-based Meltzer, Lippe, Goldstein & Schlissel. Meltzer flew to the capital May 14 to meet with Sen. Max Baucus of Montana, the ranking Democrat on the finance committee.

Other Long Island attorneys have also been involved in efforts to amend the estate tax legislation.

Eric Kramer, a partner with Farrell Fritz, visited Washington last week to speak with Sen. Hillary Clinton, D-N.Y., and Sen. Robert Byrd, D-W.Va., on the subject. John Lowth, an insurance executive from Melville, met with Sens. John Corzine, D-N.J., and Arlen Specter, R-Penn.

Meltzer said he and Baucus have a relationship outside of politics and law that goes back several years. Baucus did not return phone calls seeking comment on the bill.

Steve Breitstone, an attorney with Meltzer's firm who accompanied Meltzer, said that under the bill as written, inherited real estate would no longer be subject to estate tax of up to 55 percent of its net worth on estates over $675,000. However, it would be subject to capital gains tax on its appreciation from the time the deceased purchased it.

Currently, heirs are given a pass on capital gains on inherited real estate, a concept called a "step-up," so they are not taxed on it twice. If the heir or beneficiary sells the property, its basis for capital gains is its value at the time it was inherited.

The new law could hurt the very people it is intended to help, such as family-owned real estate development businesses and farms, Meltzer and Breitstone said.

Breitstone gave the following example: Suppose a parent bought a piece of land decades ago for $100,000, and its value has since appreciated to $1 million, but the parent has a $900,000 mortgage against it. "Farmers do this all the time," as do development companies, Breitstone said.

Under current law, the heirs would have to pay estate tax on the $100,000 net worth of the property, about $55,000. Under the new law, they would owe capital gains tax - 20 percent - on the $900,000 appreciation. That would amount to $180,000, almost twice as much as would gain if they sold the property. In other words, instead of realizing $45,000 from the land, they would be $80,000 in the hole.

Breitstone suggested changing the law to pay capital gains only on the net value of the property after the mortgage debt, or allowing the heir to pay whichever works out to be lower, the capital gains as proposed or the estate tax under current law.

Meltzer urged the senator to at least put in a grandfather clause to exempt property that has been bought before the law passes. "They told us that no-one had made that suggestion before, that it seemed just and that they would give it consideration ... I got the impression they would," Meltzer said.

Stephen J. Silverberg, a partner in the firm Silverberg and Hunter, and tax estate planning chair of the New York State Bar Association elder law section, saw other flaws in the pending legislation.

He said the proposed estate tax repeal raises a potential catch-22 with regard to the gift tax, income taxes on gifts worth over $10,000. If the estate tax is lifted but the gift tax left in place, a man who planned to give his adult offspring shares in the family business might decide to just let them inherit it. "That might not be the best thing for the business," Silverberg said, and it would cost the government extra money.

However, if the gift tax is lifted as well, as has been proposed, it could lead to other tax schemes: for example, a parent who has bought a stock that has gone way up in value "gives" it to his grown child, who is in a much lower tax bracket; the child sells it, pays a much reduced tax rate on its appreciation, then "gives" the proceeds back to the parent.

The repeal could also lead to problems for the 38 states that rely on a portion of the estate tax that the federal government gives them in lieu of an estate tax of their own, a policy adopted in recent years. "New York State will lose 5 percent of its revenue - where are they going to make that up from? They're going to have to have their own estate tax again," Silverberg said.

More beneficial to family farms and businesses would be to raise the amount of wealth exempt from estate taxes from the current $675,000 to $2 million, he said.