Measure By Measure

The Fine Print

While the administration's tax-cut proposals are attractive to small-business owners, the package unfortunately includes a host of new business taxes. The administration also wants to eliminate the tax benefits of a number of popular estate-planning techniques. These include strategies such as establishing a family limited partnership or a Crummey Trust, named after an important tax case of the late 1960s. The Crummey Trust is a popular technique that allows taxpayers to transfer property out of their estates, typically to their children, while at the same time delaying the date when the children would have control of the gift. (For more details on family limited partnerships, see "Tax Talk," July 1997.)

Clinton also wants to raise additional revenue by boosting taxes on insurance companies that maintain higher than necessary reserves against their annuity contracts. The Department of the Treasury claims high reserves cause a "material understatement" in the income of life insurance companies, which allows them to pay less federal tax. In addition, Clinton is proposing to tax any exchanges between annuity contracts. Currently, individuals with variable-rate annuity contracts can generally transfer their investments among different types of funds without paying taxes on any of the gains.

The 1999 budget package also includes a provision that would make converting from a C corporation valued at more than $5 million to an S corporation a taxable event. The change would mean that both the corporation and its shareholders would immediately realize capital gains when making the conversion. The administration has tried unsuccessfully to win support for this proposal in the past.

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This article was originally published in the June 1998 print edition of Entrepreneur with the headline: Measure By Measure.

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