President William Jefferson Clinton
1600 Pennsylvania Avenue
Washington, DC 20500

Dear President Clinton:

     I thank and commend you for your firm and decisive veto of the irresponsible fiscal bills recently put forth by Congress. I hope you will continue in this regard, and I am writing to alert you to the negative repercussions that will ensue if recent proposals to eliminate the estate tax are enacted.

    The first objectionable part of the proposed legislation is that it will not take effect until the year 2008. How do these legislators know that we will not need the money at that distant point in the future? If we’re going to repeal it, let’s do it now while we still have a budget surplus. Don’t let them get away with making empty promises to their constituents that will come back to haunt future lawmakers after the current congressional terms have expired.

    The second, and most objectionable part of the proposal would be the elimination of the "step-up" in basis currently allowed to a decedent’s estate. This would have a severe adverse impact on all taxpayers, and would create a counterproductive, paperwork nightmare for our government. The significance of this change will not be understood by the taxpaying public. Even the legislators themselves do not appear to comprehend what they are doing (or they don’t care because they are leaving the problems for future generations). Let me illustrate by the following example:

Assume I drop dead tomorrow. My only asset is an investment in the stock of a publicly traded internet company. I paid $1,000.00 for this stock 5 years ago and it is now worth $500,000.00 (note that stuff like this really happens in the unreal world of the stock markets; unfortunately, it never really happened to me). Under current law, my $500,000.00 estate would not be subject to any death taxes, and, under most circumstances, my estate would not even be required to file a tax return.

Pretty simple so far. Under both current law and under the proposed legislation, my $500,000.00 asset would not be subject to estate tax. Now for the hard part: the "step-up" in basis. This deals with income taxes which are interrelated with estate taxes, but not quite the same.

If I sold the stock before I died I would have to pay income tax of about $100,000.00 on the $499,000.00 profit (or the difference between the value received on sale of $500,000.00 and my cost of $1,000.00, at the capital gain rate of 20%). This result would be the same under current law and the new proposals.

The difference is that under current law, my heirs’ cost basis is "stepped up" to the market value of the property at the time of my death. Thus, if my heirs sold the stock for the same $500,000.00, they would have no profit on this sale (and thus no income taxes) because their cost basis is now "stepped up" to $500,000.00, instead of my $1,000.00 original cost. In other words, I would escape the $100,000.00 capital gain tax on the stock’s appreciation in value if I held the stock until I died.

Under the proposed new law there would be no "step-up" in cost basis at the time of my demise. Thus, the cost basis of the stock to my heirs would only be $1,000.00. Unlike the current result described above, my heirs would now be liable for the $100,000.00 capital gain tax when they sell the stock.

True, there would be no estate tax. I’m sure the politicians will be quick to publicize this "gimmick." However, there would be no tax on an estate of this size under current law anyway. Will these politicians be as quick to point out the negative aspects of this proposal? Are they even aware of them?

    As you can see, the one major break bestowed on all taxpayers, rich and poor alike, occurs at the time of our demise. Please don’t let these shortsighted office seekers revoke this benefit in the guise of simplification or administrative ease. Think of the administrative burdens on both the taxpaying public and Uncle Sam. Under the new law, my children would have to keep records to prove my original cost basis and IRS would be responsible for auditing that cost. What if my cost was $400,000.00 instead of $1,000.00? How would my children prove it if they couldn’t find my records from 5 years ago? How about if I bought the stock 25 years ago and the records no longer exist? What if I inherited it from my grandfather? What if I kept sloppy records during my lifetime? Because of these accounting and tax nightmares that we will inevitably encounter if we are forced to delve into the deep, dark past, it is imperative that the issue of my prior cost basis be put to rest at the same time that I am put to rest. If our legislators are truly interested in simplification, tell them to take a look at my letter to Steve Forbes (copy enclosed).

    $650,000.00 is the amount of the current exemption from estate and gift taxes. This exemption will increase to $675,000.00 for anyone who dies in the year 2000, and will eventually reach $1,000,000.00 by the year 2006. Thus, the vast majority of my clients and the taxpaying public will be exempt from estate taxes under existing law. My belief is that my more "well to do" clients would not mind the tax so much if the rates were not so oppressive. So the next step in estate tax reform should be a drastic cut in rates. If there is any money left after that we could consider some of the more radical changes currently on the table. If we do decide to repeal the whole thing we should do it in a sensible manner, not by abruptly substituting one confusing tax regime for another.

    Please let me know if you need any further information on this subject, or if you need any help with your personal tax returns. The rules for changing residence into New York are quite complicated and you will have to file part year returns. This will be especially tricky if you and Hillary do not move at the same time, so I suggest you start planning in advance of year-end. Good luck in your new home.

Warmest regards.

cc: World Wide Web
P.S. I hope you’re not still mad about the poem I wrote last year!

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