RESEARCH Business Government

TAX REFORM
Changes in estate tax law of little consequence to most, scholar says

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

11/1/02

Photo by Bill Wiegand Richard L. Kaplan, a law professor at the University of Illinois at Urbana-Champaign, examines in an article how ending the estate tax last year became a paramount issue in Washington and "distracted attention from issues that are far more pressing for older Americans."

CHAMPAIGN, Ill. — Somewhere in the corridors of Capitol Hill, the important needs of elderly Americans were shunted aside for a change in the federal tax code that will have no consequence for the vast majority of senior citizens, according to a noted scholar of elder law.

Richard L. Kaplan, a law professor at the University of Illinois at Urbana-Champaign, examines in an article how ending the estate tax last year became a paramount issue in Washington and "distracted attention from issues that are far more pressing for older Americans."

The passage of the Economic Growth and Tax Relief Reconciliation Act in May 2001 revised the tax on the transfer of a person’s wealth to his survivors, including the complete repeal of the tax in 2010. "Whether that particular provision takes effect as scheduled is highly conjectural at this point, but the indisputable point is that substantial congressional and presidential attention was focused on an issue that affects a very small minority of older Americans."

While the revision of the estate tax was characterized by members of both parties as a major benefit for older Americans, it is questionable whether the estate tax is "even an issue for seniors, since it does not affect them, only their survivors."

According to Kaplan, the issue had superficial political appeal because many older people feel that they have paid taxes throughout their lives and should not be taxed at their death. But because the estate tax was not levied on estates below $675,000, only about 2 percent of decedents face any tax liability. "Nevertheless, professional advisers often equate financial planning for older people with estate-tax minimization. As a consequence, estate tax reform is often cast as an elders’ issue, despite the fact that no one pays estate tax while he or she is alive, and neither does that person’s surviving spouse."

Much more pressing for older people is plugging the loophole in 401(k) plans that permit employees and retirees to invest most or all of their savings in an employer’s corporate stock. In 1996, an attempt was made in Congress to prohibit employees from placing 401(k) assets in a single stock, but a coalition of corporations beat back the measure. "It is time for Congress to reconsider the concentration of retirement fund assets in corporate employer stock," Kaplan wrote.

"Any new legislation, moreover, should prohibit any grandfathering of existing plans. Instead, it should provide some reasonable schedule for bolstering the financial integrity of any 401(k) plans. Otherwise, these retirement accounts, which often constitute their owner’s single largest nonresidential asset, may be unable to provide the retirement security that older Americans have been led to expect."

Kaplan’s article is in the Elder Law Journal, which is published by the Illinois College of Law.