CLINTON GIFT TAX PLAN WOULD END ‘CRUMMEY’ESTATE PLAN TRANSFERS: SO WHAT IF THE FAMILY BUSINESS HAS TO BE SOLD? IT’S ONLY ‘FAIR’

If the administration gets the changes it wants in gift taxes, business owners will have a harder time passing their companies to their children. President Clinton is also taking aim at another favorite tool of advisers: life insurance.

Two proposals, in particular, have advisers worried. One would end the practice of letting family limited partnerships discount the value of assets transferred in the limited partnership. That would increase taxes so much that in many cases the business would have to be sold to pay them. Another proposal would make transfers of property to trusts eventually taxable as part of an estate.

Currently such transfers, using what are known as “Crummey” powers, named after the 1968 court case that made them legal, are sheltered from estate taxes as long as the beneficiary can withdraw them for a brief window, usually about 30 days. Typically, advisers recommend clients buy substantial life insurance to benefit their heirs, who can use the proceeds to help pay estate taxes.

“It’s a double whammy because what we would typically do today in planning is make gifts of under $10,000 by using the discount, and then also use the Crummey power,” says Robert Perez, a personal financial specialist and certified public accountant in the New Orleans office of KPMG Peat Marwick LLP.

The Administration estimates that eliminating Crummey powers would bring in $100 million more in the five fiscal years ending in 2003.

Taxpayers can pass on estates worth up to $625,000 in 1998 taxfree. The exemption will gradually rise to $1 million by 2006. Gifts of up to $10,000 annually also can be made tax-free.

close them up

“In today’s environment we can make gifts without using up any of the $625,000,” Mr. Perez says. “If both of Clinton’s proposals become law, then the same gifts would now begin to use up the $625,000.”

Advisers are critical of the proposals. “It certainly will make things more difficult for business owners and family-owned bu
sinesses to pass that business down to their sons and daughters, which is something we as a country ought to promote rather than discourage,” says Robert Crew, a financial planner with Heartland Financial Group in Wichita, Kan.

A Treasury Department official who declined to be identified says the proposals are designed both to prevent people from transferring large amounts of assets to heirs tax-free and to close loopholes “designed to promote fairness in the estate and gift tax system.”

As an example, the official says, discounts taken for assets transferred in family limited partnerships have been as high as 60%. Discounting has been allowed because of the lower fair market value of typically illiquid assets.

“To claim a 60% discount. . . makes the system very unfair,” the official says. “If someone uses a limited partnership technique and another one doesn’t, the one who doesn’t has a much bigger tax bill and there really isn’t any difference between the two people’s assets.”

The government estimates that its proposal to eliminate the evaluation discount would bring in an additional $1 billion by fiscal 2003.

Concerning the Crummey trust proposal, the official adds, money put in trust would normally be counted as gifts. Abuses occur when gifts are made “to 17 nieces and nephews for a trust that is for a granddaughter,” the official says. Using Crummey powers, much more money can be given away free of estate tax than the $10,000 normally allowed.

noT the time for action

Many advisers are predicting the Republican Congress will nix the proposals and so some caution against trying to beat any changes.

“At this point, to take an alarmist point of view is really premature,” says Ted Kurlowicz, professor at American College, a school for insurance agents and other financial professionals in Bryn Mawr, Pa.

If the Crummey trust proposal is enacted, however, it would render many of the often-expensive insurance policies purchased useless as estat
e planning tools.

“People who have already set up trusts would be stuck with having to continue to pay for the insurance and not get annual exclusions,” says San Jose, Calif., tax lawyer Owen Fiore of Fiore Law Group, who has defeated the IRS in court over Crummey challenges.

“If they’re setting up a trust now,” he adds, “the financial planner needs to think about alternatives to the Crummey trust.”