Congress Dangles a To-Die-For Tax Break

A well-timed death could yield an estate tax bill of zero. But don't make plans yet: President Clinton will surely veto the measure.
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The tax-cut plan recently passed by

Congress

contains an estate-tax repeal long pushed for by the Republican majority. But it comes with a catch: You have to die within a nine-month window in 2009 to take advantage of it.

The repeal, part of a $792 billion package of tax cuts pushed through by the GOP with little Democratic support, would take effect Jan. 1, 2009. But because of a technicality, the tax would be reinstated the following Oct. 1.

That could lead to some interesting estate-planning considerations.

"For those fortunate -- or unfortunate -- to die during this

nine-month period, there would be no federal estate tax," says Bill Fleming, director of personal financial services for

PricewaterhouseCoopers

in Hartford, Conn.

The tax bill would phase out and eventually repeal taxes on inheritance and gifts beginning in 2003, with full repeal in 2009. At that point, all exemptions, exclusions and credits that currently apply to the estate tax would be eliminated, and the top rate would be lowered to 20% from 55%, in line with the current top long-term, capital-gains rate.

But the entire tax-cut measure, including the estate-tax repeal, would expire after a 10-year period due to the

Byrd Rule

, named for Sen. Robert Byrd (D., W.Va.). The rule says "we can't have any legislation effective for more than 10 years if it's going to cause on drain on the Treasury," says Martin Nissenbaum, national director of personal income-tax planning at

Ernst & Young

. And that's what this bill would do.

"This rule was put in place by the

Senate

to stop them from spending more money that they have," says Steve Woolf, director of tax policy for PricewaterhouseCoopers in Washington.

The Senate could have neutralized the Byrd Rule with at least 60 votes. But that was a problem because the Republicans have only 54 votes, and you'd be hard-pressed to find a Democrat to override the Byrd Rule in this case.

To get around the Byrd Rule, most of the tax-cut provisions are "phased in," "phased out" and "sunsetted." That means the estate-tax repeal, as well as most of the rest of the legislation, would eventually disappear, Nissenbaum says.

Other parts of the tax bill,

H.R. 2488, would reduce income-tax rates in each bracket by 1 percentage point, lower capital-gains taxes, end the so-called marriage penalty, eliminate the alternative minimum tax and create new education and health-care breaks.

President Clinton

has vowed to veto the tax-cut package the second he gets his hands on it. So it's unlikely the nine-month "to-die-for" window will actually make it into law.

And even if it did, Congress could later pass new legislation extending the estate-tax repeal beyond Oct. 1, 2009.

But if it did become law, it wouldn't be the first time an unintended quirk in estate taxes became law. A drafting error in the 1997

Internal Revenue Service

overhaul bill inadvertently granted a $200,000 tax credit to people inheriting estates worth $17.2 million or more.

Attempts to correct the error during the current session of Congress have been shot down by

House Ways and Means Committee

Chairman Bill Archer (R., Texas), who opposes estate taxes and refuses to consider a measure increasing them -- even to correct an error.