Buffett on estate taxes

[Martha]

What loopholes are bothering you guys? One that really bugged me was the "Gallo" law, which allowed the Gallo family and only the Gallo family to pay an estate tax over a very long time. But they still had to pay.

Charitable remainder trusts are somewhat problematic to me. As well as the transfers of ownership of life insurance.

The family limited partnership scheme seems to have run its course.

You know, one big tax benefit all estates, and thus the heirs, get is the step up in basis. Even small estates that have no estate tax due never end up having to pay a tax on the "gain" in value of capital assets. I have a hard time imaging that an estate tax repeal would not also result in repeal of the step up in basis. This would create big tax issues for small estates to large estates. So when you sell dad's house after he dies, you will need to know his basis and pay tax on the gain. What about those 10 shares of AT&T stock? What a nightmare that would be. But if you are looking for fair, that would be fair because after all, that gain was never taxed.

Give me the estate tax with a reasonable exemption instead.

[Hamlet]

So you would be satisfied with something like my 5 million exemption/35% rate, rather than a total repeal of the estate tax?

I agree, I don't think it would cost much revenue at all to do that. It might actually end up increasing collections, like the dividend tax cut appears to have.

Now that we have that settled, let's get the AMT figured out

Originally Posted by ERD50

I see youbet covered that already - I'll just add: The estate tax only accounts for ~ 1.5% of revenue. If the exclusion is raised, and the marginal rate lowered, and loopholes closed (people would be less inclined to pursue loopholes with a higher excl and lower marginal rate anyhow), you would still be collecting the same ballpark amount (maybe even more?), so there isn't that much offsetting required. So, yes, do it with better tax code.

-ERD50

[ERD50]

Originally Posted by Hamlet

Now that we have that settled, let's get the AMT figured out

AFTER I cook a Turkey to perfection! I'm a busy guy! - ERD50

[Martha]

I say a million dollar exemption, indexed for inflation. I might be convinced of two million, but that is a stretch for me. Also, the rules regarding transfer of ownership of life insurance need to be tightened up so there isn't a huge tax free benefit resulting from increases in life insurance value.

I also say that the AMT is the real problem and I would much rather talk about that.

[ERD50]

Originally Posted by Martha

What loopholes are bothering you guys?

Simple - any and all loopholes. Loopholes are what drives people nuts about the 'unfairness' of current taxes - even if it is only a perceived unfairness.

If we are to have an estate tax, a high exclusion and low rate means no loopholes of any sort are needed, because the tax is not onerous.

You know, one big tax benefit all estates, and thus the heirs, get is the step up in basis. Even small estates that have no estate tax due never end up having to pay a tax on the "gain" in value of capital assets.

...

So when you sell dad's house after he dies, you will need to know his basis and pay tax on the gain. What about those 10 shares of AT&T stock? What a nightmare that would be. But if you are looking for fair, that would be fair because after all, that gain was never taxed.

This should be predictable and consistent - I don't like cap gains taxes either! They are complex, require way too much long-term book keeping for honest people trying to comply with the letter and spirit of the law, and easy targets for cheating.

Originally Posted by Hamlet

So you would be satisfied with something like my 5 million exemption/35% rate, rather than a total repeal of the estate tax?

Originally Posted by Martha

I say a million dollar exemption, indexed for inflation.

I also say that the AMT is the real problem and I would much rather talk about that.

If we are to have one, $5M/35% is getting there. Maybe by cutting out any/all loopholes the rate could be even lower? Geez, we are talking 1.5% of revenue here - I don't think that is even worth having a separate policy for. Too much slice/dice. Be done with it!

AMT is another stupid implementation of tax policy. But it's not the title of this thread.

-ERD59

[Martha]

ERD, you still haven't told me what you think are loopholes. You make it sound like there are a zillion of them and as a result really rich people don't pay estate taxes. That is not the case.

[cute fuzzy bunny]

Let me continue with the star trek theme...

Resistance is futile...you will be assimilated...

[ERD50]

Originally Posted by Martha

ERD, you still haven't told me what you think are loopholes. You make it sound like there are a zillion of them and as a result really rich people don't pay estate taxes. That is not the case.

I didn't realize you were asking for specific examples of loopholes. Heck, I don't know the specifics - I'm not a tax attorney or financial planner, nor am I involved with $20M estates.

Are you saying the loopholes do not exist?

I'm not sure what diff the specifics make, I'm sure I could google some up if I wasn't planning for company right now, but from the govt panel I linked earlier:

The Economics of the Estate Tax

C. Fairness, Simplicity and Efficiency

One of the most distinguishing attributes of the estate tax is the broad range of avoidance options it permits. There are so many legal loopholes in the estate tax that it has earned the nickname “the voluntary tax.” 126

The tax avoidance options available to the estate planner are extensive and well-documented. 127

Virtually any individual who invests sufficient time, energy and money in tax avoidance strategies is capable of escaping the estate tax altogether. Some estate tax critics have noted that the only reason individuals submit to the tax at all is either ignorance of the available avoidance options or the avoidance options seemed too costly. 128

The large number of tax avoidance options permitted under the estate tax means that the tax will result in a tax burden distributed unfairly among payers, be unnecessarily complicated, and significantly distort taxpayer behavior.

...

Taxpayers all along the income and wealth spectrum can eliminate or greatly reduce their estate tax liability with enough advance planning. Thus, an individual worth $5 million can not only pay less in estate taxes than other individuals worth $5 million, but can pay less than those worth $1 million.

This aspect of estate taxation was summarized by Munnell, who wrote: Those people who take advantage of these [tax avoidance] opportunities will end up paying little or no tax, while those who do not plan ahead will pay significant amounts. Horizontal and vertical equity considerations have disappeared in the estate and gift area; tax liabilities depend on the skill of the estate planner, rather than on capacity to pay.

-ERD50

[al_bundy]

Originally Posted by Martha

ERD, you still haven't told me what you think are loopholes. You make it sound like there are a zillion of them and as a result really rich people don't pay estate taxes. That is not the case.

there are all kinds of trusts you can set up as well as properly structuring a business to avoid estate taxes

there are entire law firms dedicated to practicing laws for seniors and doing things like estate planning and properly structuring assets so a millionaire can be on medicaid and not have their home taken away when they die

[youbet]

Originally Posted by Martha

ERD, you still haven't told me what you think are loopholes. You make it sound like there are a zillion of them and as a result really rich people don't pay estate taxes. That is not the case.

Are you saying that there aren't numerous loopholes used by estate planning professionals to assist clients reduce or avoid estate taxes?

[Martha]

No, no, no.

I mentioned a couple of changes that should be made to tighten up the estate tax system, specifically concerning transfers of ownership of life insurance into irrevocable trusts or Crummy trusts or even directly to beneficiaries and maybe charitable remainder trusts. Generally, setting up an irrevocable trust can be used to avoid estate taxes because you gave the asset away and you no longer have control. But most people do in fact want to retain some control. And the income taxes on irrevocable trust income are quite high. And irrevocable is irrevocable, which is bothersome to most people. Nevertheless, I think the gifting rules regarding irrevocable trusts need work.

What was bugging me was all the talk about loopholes and how they are exploited but with no one pointing to any facts about how much of a problem the "loopholes" are. Some things which people think are loopholes, others think make perfect sense. So, I wanted to know what bothered you guys and what you thought people were getting away with. I mentioned some of what bothered me..

al-bundy mentioned planning which would take a millionaire and turn him into a Medicaid recipient. Not bloody likely. Medicaid looks back for years on gifts. Lawyers can get into criminal trouble for aggressive medicaid planning.

There is planning which is done to maximize use of a husband's and wife's estate tax exemption through use of trusts. I don't think that is a loophole. They never get more than their own exemption.

Gifting programs is where most loopholes exist. For example, I have done succession planning where an owner of a business gives non-voting stock each year to his children. The non-voting stock is worth less than voting stock because their is no control premium. So this minimizes gift tax issues. Arguably this is a loophole, but only if the stock turns to voting stock when dad dies and no additional tax is due.

Even so, you can only gift so much before a tax problem occurs.

Anyway, what I am saying is that don't assume that there are a zillion loopholes and people are rendering themselves broke to get medicaid or that multimillionaires are dying without owing any tax.

[ERD50]

Originally Posted by Martha

Anyway, what I am saying is that don't assume that there are a zillion loopholes and people are rendering themselves broke to get medicaid or that multimillionaires are dying without owing any tax.

OK, it's difficult (esp for someone outside the industry) to ever measure how much 'avoidance' of something there is. My point all along is that a 50% rate motivates people to avoid it. It is bad policy, IMO.

So, to keep it simple, do you disagree with these statements from my link?:

Thus, an individual worth $5 million can not only pay less in estate taxes than other individuals worth $5 million, but can pay less than those worth $1 million.

tax liabilities depend on the skill of the estate planner, rather than on capacity to pay.

-ERD50

[Martha]

Well, as in most things in the law, I would have to say it depends. First, if you have a one million dollar estate, currently you don't have to pay federal estate taxes.

But it is meaningless to say that two individuals each worth five million can pay different amounts of estate taxes. Just like individuals earning exactly the same income will likely pay a different amount in income taxes. The question is whether the differences are fair or not fair and whether planning costs are too high and too much of an economic drain.

Is it fair that the heirs of a small business or family farm can pay estate taxes over time but someone who just inherits cash cannot? Probably. Is it fair to be able to transfer assets to an irrevocable trust and avoid estate taxes? If not, is this an area of abuse? Maybe yes, at least for life insurance trust.

You need to look at each specific issue and decide that issue on its own merits, rather than just assuming it is unfair if two people with the same net worth pay different amounts of tax.

As far as planning costs, the article you site probably blows the cost out of proportion. http://www.house.gov/jct/x-108-07.pdf
I also think that if you lead a complicated financial life you have to expect associated costs. Nevertheless, the same planning tools are available, whether you are worth 2 million or a hundred million.

Well, time to go start cooking my scalloped corn for dinner.

[youbet]

I'm certainly no expert, but intuition tells me that when an area of taxation has many professional circumventers, avoiders and work-arounders gainfully employed to "help you" circumvent, avoid and work around paying those taxes, there are probably too many loopholes.

Personally, I think estate planning should be the process of declaring how your worldly goods shall be distributed to your heirs at the time of your death and not how your worldly goods should be organized to circumvent, avoid or work around estate taxes.

Whatever the tax rate or the exemption level turns out to be for estate taxes, the process of determing the amount of tax should be straight forward and obvious to even the lay person. I believe you when you say that rumors and tales of some rich folks greatly reducing their estate tax obligations through loopholes are probably overstated and run rampant like urban legends. On the other hand, if the estate tax is not going to be eliminated or permanently changed to have a high exemption, then it should simultaneously be rewritten so that work arounds are non-existent.

The availability of sophisticated work arounds to avoid/minimize estate taxes by those smart enough and wealthy enough to hire professionals to implement them simply promotes a lack of class mobility and the concentration of wealth in this country, IMHO.

[Martha]

I understand what you are saying, but for most of us on this forum, estate planning is relatively simple. We will want to try to try to plan to take advantage of our personal exemption and if we want to get fancy, we can do some gifting while we live, and we can do some kind of life insurance trust. Not too expensive, and not too complex. And the tail won't be wagging the dog.

For most people in the United States, estate planning is simply "the process of declaring how your worldly goods shall be distributed to your heirs at the time of your death."

If you have a business with significant value, then planning is more complicated. Is it too complicated? I don't think so from an estate planning aspect. I do think things are way too complicated for people starting out in a business. I know, a different topic, but one that effects so many more people. Payroll taxes. Business taxes. Untold number of legal issues concerning employment. Rules particular to your type of business. Liability insurance issues. Financing. Health insurance. It is mind boggling for people who are trying to grow their business.

I think we (as in our elected representatives) worry too much about the estate tax and not enough about how to help small businesses grow and not overwhelm them with the same complexities that a larger business is better able to handle.

[ERD50]

Originally Posted by Martha

I understand what you are saying, but for most of us on this forum, estate planning is relatively simple.

I don't think people were so concerned about how estate taxes impact 'most of us', but were pointing out that the super-rich can avoid paying much of this tax.

Which seems counter to the whole intention of the tax. Which, in the opinion of many, makes it a bad tax policy.

-ERD50

[Martha]

Again, you have to look at each thing that is a claimed loophole and decide if it is fair. Is is fair for Bill and Melinda Gates to have set up the Gates Foundation, which may serve to do good charitable things, but which might also perpetuate management in Microsoft and avoid estate taxes? These are the questions to answer and if a problem exists, address it.

Same thing with any tax in my mind. In 1986 when the tax code was substantially simplified, the idea was that there would be less tax avoidance schemes. True for some things, not true for others. And now the tax code is bigger than it ever was. Some of the complications come from trying to make things fair in a complicated world. Some complications come from special interests trying to get some advantage for themselves, which may or may not be fair.