Congress Considers Estate Tax Repeal What it Means to Oregon's Family Owned Businesses

By Edward H. Trompke

In early July 1999, the Chairman of the House Ways and Means Committee announced that his 1999 tax relief plan will, if adopted, phase out the federal estate, gift, and generation-skipping taxes over the next ten years.

Clearly, the repeal of the estate and gift tax will put many lawyers and accountants out of work, and will allow family-owned businesses to structure their succession plans on real economic and family issues rather than on tax consequences.

For example, a retiring family member could simply give his or her descendants as much stock in a company as he or she wanted, at any time. A retiring owner could retain a guaranteed payment for life, including such luxuries as veto power over the Board of Directors. No tax ramifications would result and no expert legal counsel would be required to vet the details.

Small business is the backbone of the nation. Any change in the tax structure that strengthens family business is a very good thing. Other policy arguments must be considered before this plan is adopted, however.

First, economists agree that deficit spending accelerates economic growth, at least in the short term. The huge deficits accumulated after World War II contributed immensely to economic growth and to the accumulation of wealth in the second half of this century. That wealth makes up the bulk of the estates of the generation now in its senior years. Since the wealth was generated in part by the creation of public debt, it makes sense to ask whether to tax that wealth to help retire the debt. This policy argument has no "right" answer, but the question of who should retire the national debt should be asked.

A second concern, growing out of the phase-in period, raises almost bizarre issues. For example, the declining rate of estate and gift taxes over the ten-year period creates an incentive to keep family members alive. Unscrupulous descendants might keep their parents and grandparents on ventilator machines, in nursing homes, and in other care facilities for the sole purpose of reducing taxes.

Descendants might thwart the express will of their parents not to be resuscitated by seeking injunctions, or by having their elders declared incompetent, when they refuse medical treatment to end their suffering.

Oregon has adopted a statutory "Advance Directive to Physicians" which allows an individual to direct his or her physician either to take extraordinary action to preserve — or not to preserve — life. Following repeal of the estate tax, Advance Directives will become more important.

The question becomes even more complex under Oregon's assisted suicide law. Could a doctor be liable for interfering with an heir's right to inherit money at a reduced tax rate if death is accelerated?

The tax code has numerous social and moral effects, many of which are unintended. Even such seemingly benign actions as repeal of the estate tax raise significant moral and legal questions. Only time will tell if we are wise enough to answer them. Congress may take years to decide these complex issues. Whatever and whenever the vote, taxes or no, there is no substitute to a coherent plan for business succession.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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