Buffett on estate taxes

[ERD50]

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.

 

[Martha]

I mentioned this above, but a repeal of the estate tax will fall hard on the "medium" rich, most of us here, because of the step up in basis rules. You might want to read this article: Allan Sloan - Estate-Tax Repeal Would Hurt the 'Small Rich' - washingtonpost.com


The Next Hurrah: Why America Needs An Estate Tax
"Half of the over $20 billion collected through the estate tax is paid by only 3,500 large estates, those over $5 million. These represent only .14% of Americans who die each year. Special rules allow family farms and businesses to further reduce or defer estate taxes. Of the 18,800 estates that filed returns in 2003 (out of approximately 2.4 million people who died), only 440 consisted primarily of family farms or businesses. (Center for Budget Policies and Priorities".)

 

[kcowan]

Where I live there is not now nor has there ever been estate taxes. Nor are there any limits on gifting. All such bequests move tax free to both parties. That's about $4 billion of uncollected taxes in Canada (at 1/10th the US).

I suppose this produces some wealthy boomers when their parents pass on. For me personally, this has not been a big factor (estimated to be about 30% of net worth). But it was a factor is us not selecting the US as a snowbird destination. So the US forgoes the spending that we would generate in retirement.

 

[Martha]

Keith, isn't it the case that upon death in Canada, the death is treated like all assets were sold as of that date, so a tax is due on the gain? Inotherwords, no step up in basis? If my recollection is correct, than most people in Canada end up paying more taxes on death than in the US.

 

[youbet]

I mentioned this above, but a repeal of the estate tax will fall hard on the "medium" rich, most of us here, because of the step up in basis rules. You might want to read this article: Allan Sloan - Estate-Tax Repeal Would Hurt the 'Small Rich' - washingtonpost.com

This is a little confusing Martha. Earlier, you said you could support an exemption of $1mil....maybe $2 mil. But this article clearly bases itself on the 2009 individual exemption rate of $3.5 mil.

Hey, I'd be happy with a $3.5 mil exemption level. And if we could toss out some of those loopholes, so much the better.

I agree with the article, let's not eliminate the estate tax but rather use the 2009 exemption and rates.

 

[Martha]

I think 3.5 million is too high, but odds are I am in the minority.

 

[youbet]

I think 3.5 million is too high, but odds are I am in the minority.

OK, that's what I thought you said and was surprised you referred to an article which supports it's thesis based on a $3.5 mil exemption.

The second article you referenced also supports an exemption higher than $1 mil. The author starts out saying the real issue is the super rich and quotes the Waltons, Mars and another family I can't remember. He then goes on to show that a $1 mil exeption sweeps in 3.5 times as many family farms as a less onerous $2 mil exemption. A $1 mil exemption also sweeps in 29k more estates than a $2 mil exemption.

At $5 mil, the fed gov would still collect 68% of the revenue it would collect at $1 mil, but the number of estates involved really drops into nothingness.

Another good article and author.

 

[samclem]

Just keep distilling down the number of people affected and get the very vilest of the undeserving exploiters of the proletariat. Hey, the richer they are, apparently the less they deserve to keep their property. Soon I expect a proposal to just execute the wealthiest person in the US (why wait till he/she dies? He's got our money!!) and seize their property. Yeah, and sell their kids into slavery. That's what they deserve!

 

[kumquat]

Where I live there is not now nor has there ever been estate taxes.

IIRC. Canada traded estate taxes for capital gains taxes in ~1972. Before that, capital gains were tax free but estates were taxed. N'est pas?

 

[kcowan]

IIRC. Canada traded estate taxes for capital gains taxes in ~1972. Before that, capital gains were tax free but estates were taxed. N'est pas?

Yes the equity holdings are deemed to have been sold upon death. The way around this is to put the holdings in JTWROS. Then the holdings pass in kind without any tax.

The exception to this is the RRIF (401K) which becomes taxable. But since tax was never paid on the money in it, that is fair.

Houses are subject to probate fees in many locations too. About $5k for a $400k house, unless there is JTWROS there too. But then capital gains might be diue on half the house (w/o the principal residence exception).

 

[ERD50]

Soon I expect a proposal to just execute the wealthiest person in the US (why wait till he/she dies? He's got our money!!) and seize their property. Yeah, and sell their kids into slavery. That's what they deserve!

samclem, it's hard for me to be so cynical after an enjoyable Thanksgiving feast with family and friends, but what the heck....

Excellent observation, your proposal should sound attractive to those who favor the govt tinkering with class mobility issues, but it must be implemented on a far grander scale for meaningful impact. So lets' run with it. My two part extension of your plan:

PART 1: Some people favor the estate tax as a means to limit the amount of money handed down to heirs that did nothing but have the 'luck' of being born into a wealthy family. But, as we all know, money isn't everything. So why stop there? These 'lucky' kids not only may receive money, but probably inherit some 'success genes', and be raised in a supportive environment. It's just not fair! So let's expand on your idea of selling the kids into slavery.

When a child is born, we must measure the potential of the parents to accumulate wealth. If they are in the top quartile of potential wealth accumulators, their child should be switched at birth with one from the lowest quartile. It's only fair.

Since a child-bearing couple may be too young to actually have accumulated significant wealth, we must measure that 'potential' rather than their actual wealth at the time. We will need a govt agency to determine this potential. Maybe they can create a 'basket of success' that could be used (health, education, stability, current income, social skills, good looks, socioeconomic background, etc). They could get help from the CPI people. But the extra complexity should be worth it, right? Hopefully, that extra complexity does not include any loopholes to allow very wealthy people to appeal their 'success' assessment. That could result in a whole new non-value-added industry.

PART 2: The weakness in your original suggestion is that it applies to too few, too late to make an impact. Let's get many more people, and get them before they accumulate a lot of wealth at the expense of others. We need to be proactive!

So, who are most likely to accumulate wealth? Maybe the top 1% of ACT/SAT test scores? Maybe the top 10% of the top universities? Easy - we place an automatic death sentence upon high achievers - get rid of them before they can accumulate wealth. Nip it in the bud! After all, they probably got into top schools because they had wealthy parents that instilled the values of education in them. It's not fair! Off with their heads! Babies switched at birth from the lowest quartile would be exempted of course - just make sure you hang on to your documentation!

Hmmmm, some wealthy people did it w/o that measure of education (Bill Gates, Steve Jobs). I smell a loophole! OK, we also put an automatic death sentence on the top 1% income earners each and every year. Again, don't wait for them to accumulate wealth - catch them in the act! No matter what, there will always be a 'top 1%' - no inflation adjustment or anything needed. It is so elegant! Off with their heads!

I feel a bumper sticker coming on...

"STOMP OUT SUCESS TODAY - ONLY YOU CAN PREVENT WEALTH ACCUMULATION!"

Or, as Dylan said more eloquently ...

"Bent out of shape from society's pliers, cares not to come up any higher, but rather get you down in the hole that he's in." - Bob Dylan, It's Alright, Ma

[/satire] (or was it satire?) - ERD50

PS: Yes, I have some short, serious counters to some of the pro-estate tax comments, but later.... must take a nap

 

[youbet]

Members of a society each wish the rules of that society to be constructed so as to benefit their personal circumstances.

 

[clifp]

Musing on estate tax

The estate tax is one of the handful of positions I've changed my mind on thanks to reading discussion boards like this. Years ago I took the official Republican position Estate Tax=Death Tax= Evil unfair tax on the most productive members of society.

However, after digging a bit further, I found that pro estate tax people had the more compelling argument. I also found that in general they were much better informed, like Martha in this thread. I still find the estate tax, "evil", but is less evil than regressive taxes like sales tax on food, payroll taxes etc.

Here are more comments the most popular "repeal the death tax claims" (Note the foe of the estate tax deserve marketing credit for repositioning the tax as a death tax)

1. The death tax is double taxation because you already paid income taxes on the money. Status mostly false.
The majority of very wealthy estates (10 million+) and virtually of all the billionaires in the country didn't accumulate their wealth by earning 6 and 7 digit salaries socking away a big chunk in CDs and benefiting from compound interest. Rather they gained their wealth through the massive appreciation of assets. Now in many cases these assets appreciated due to their hard work, but in most case the appreciation has never been taxed.

Warren Buffett is a classic example, Berkshire has never paid a dividend and he has sold very few of his Berkshire share, hence Uncle Sam collects taxes on 50 million a year that is reported not the literally billions he gains each year from Berkshire stock appreciation. (Obviously Berkshire has paid corporate income tax.) But it isn't just Billionaire Buffett who has benefited from this, I suspect there are tens of thousands of former employees of Apple, Cisco, Google, Intel, Microsoft Walmart etc, who will go to their grave never having paid a dime on the massive run up of their stock.

A even more common wealth creator is real estate. Virtually every town in American has one or more real estate mogul. This the guy or gal who over the years has accumulated a couple dozen pieces of property: houses, apartment building, commercial real estate etc. Due to the highly favorable tax treatment of real estate, e.g. depreciation and 1031 tax free exchanges, the mogul can accumulate 10+ million in Real Estate while paying very little tax over their lifetime.

The "small" business owner is another example of untaxed assets. One of the biggest proponents of repealing the estate tax is car dealership association. Car dealership range in value from 1 to 8 million and it is common for a single family to own several dealership in a community. Again the increase in value of the dealership has never been taxed. It is bad enough that car dealership provide everybody in the extended family (included the 16 year old nephew) with a taxpayer subsidize company car, do we need to give them more tax breaks?

2. The death tax is a largely an optional tax, with a good attorney you don't need to pay it. Status mostly true.
One of the bad things about the estate tax is there is a cottage industry designed to minimize estate tax. For the most part this only works for the merely wealthy, allowing both spouses to use their exemptions, some limited generation skipping trusts etc. However, for the really wealthy the only way escape the estate tax is to give a boatload to charity. I think this is a good thing and only slightly less beneficial to me than the estate paying taxes.

To some extent every dollar that the Bill and Melinda Gates Foundation (BMGF) spends on eradicate malaria is one less dollar the US taxpayer has to spend in Africa. (Arguable since BMGF is a more efficient at spending maybe we save even more than one dollar). I remember reading that private foundations actual spend more on education than the Federal government. Obviously local and state level spending on K-12 dwarfs both.
Now certainly a lot of charitable donations go to things that I as a taxpayer don't care about, but a lot goes to provide a social safety net, which I'd be force to pay.

It is also worth noting a majority of really large estates have minimal charitable contributions and hence pay a lot of estate taxes.

3. The Death Tax destroys family farms because they have to sale the farm to pay the estate tax. Status False.

This is one of those classic politician BS soundbites that sounds good but it is false. Farmers get lots of special breaks for minimizing estate taxes. Several studies have concluded that total number of family farms that were broken up because of estate taxes in the entire decade of the 1990s is less than 100 and more like in the dozens. Put it this way there are more people involved in this thread than the number of farmers in the entire country who would be impacted by estate taxes this year.

4. The elimination of the estate tax will make life simpler for people. Status unclear but unlikely
For the 95% of population with estate under millions none of this stuff matters. For the remaining 5% I think repealing the estate tax will make life more complicated not less.
Repealing the estate tax also repeal the automatic stepped up basis. What this means is that if the family house is worth a $1 million when mom dies that is your basis not the 120K she bought it for in 1978 and the 30K they spent on the addition in 1980 and the 50K for the bathroom remodel you spent in 2002 to make safer for her to take shower. If mom also owns a rental property or two, and some original AT&T stock, and a extensive collection of Ming dynasty China (or early America art... or dad's antique gun collection etc) you have your work cut out for you.
Uncle Sam still wants his taxes. Now in place of the estate tax you get to re-create what the cost basis for all of these family treasure are, and send Uncle Sam a check for 15% (i.e. long term capital gains) of the difference between the basis and market value.

As an example of how complicated this is. Somebody in my family bought 30 share of AT&T in the 1920s it passed to my Dad in around 1950, for the next 40 or so years they were enrolled in a DRIP. Ma Bell and her offspring have gone through literally dozens of spin offs, merger, and along with a dozens more stock splits. Over the years I have spent at least 20 hours trying to come up with a cost basis of her AT&T stock before her tax guy and I concluded she can't sell your AT&T and spin offs while she is alive. Now I face the prospect I having to figure this out once again after her death ugh.

I think people need to be careful of what the wish for. My nephew and niece make get more money if the estate tax is repealed but I pity my niece trying to figure out the cost basis of my Intel stock.

 

[clifp]

Repealing the estate tax.

Despite my previous post, I do favor repealing the estate tax in the interest of making the tax system simpler and perhaps fairer.

However, I would make a change in the income tax system. In particular I would tax inherited money at the long term capital gains rate.

Currently we have a lifetime unified gift tax exemption which allows us to give away X million during our lifetime or at our death.

I would replace gift tax exemption with lifetime inheritance exemption, which allows a person to recieve a modest amount, say $1 million, in inheritence tax free. Any money in excess of a million would be treated at LT cap gains income.

This would allow the small business owner to leave his $ 5 million business to his 3 kids and they would each owe $100K in taxes (1.67 mil each- 1million exemption@ 15%). It would also allow the owner of a 10 million business to leave it to his 30 employees, or even Warren Buffett to give each of several hundred Berkshire employees say 1 Berkshire A share.

I am curious people have thoughts about this proposal.

 

[youbet]

Your example makes no sense. Since each of Buffet's employees has already inherited $1 mil from other sources (in my modification of your hypothetical example), they wouldn't qualify for the treatment you suggest.

The tax should be dependent on the status of the deceased, not the recipient.

I agree with you that the system needs to be simpler, much, much simpler. Fees to attorneys and tax accountants should be minimized as far as estate planning is concerned.

I'm also not particularly in favor of the step up in cost basis. Keeping some records of cost basis so that heirs don't have a nightmare after your death would be simple, simple, simple compared to today's system. Also, say your estate has low amounts of unrealized gains while my estate has extremely high levels. Why should my heirs make out and yours suffer? All the gains should be taxed once. Remember, if you can't figure the basis for some equity originally purchased many decades ago, just call it zero. Probably a close estimate if the appreciation is dramatic.

 

[clifp]

Your example makes no sense. Since each of Buffet's employees has already inherited $1 mil from other sources (in my modification of your hypothetical example), they wouldn't qualify for the treatment you suggest.

.

I didn't see you modification so I am a bit confused. But fundamentally if the son of the Clayton homes founder already got a big inheritance, I think they should pay tax on Warren's generous gift. On the other hand the nice little old lady at See's who didn't have rich parents should not be taxed. Do you disagree?

The tax should be dependent on the status of the deceased, not the recipient

That is how the system currently works, but why is that right?.

The IRS is going to get 1099 this year from my gambling winnings (it was poker tournament so there was skill involved but it could have been winning the slot machine jackpot.) So we feel it is ok to tax people who win the lottery, but not people who win the genetic lottery. I don't understand the reasoning?

 

[youbet]

Do you disagree?

Yes. If there is an estate tax, I feel it should be based on the amount of the estate.

we feel it is ok to tax people who win the lottery, but not people who win the genetic lottery.

Don't know. That isn't true, so I don't know what to say.

 

[Nords]

As an example of how complicated this is. Somebody in my family bought 30 share of AT&T in the 1920s it passed to my Dad in around 1950, for the next 40 or so years they were enrolled in a DRIP. Ma Bell and her offspring have gone through literally dozens of spin offs, merger, and along with a dozens more stock splits. Over the years I have spent at least 20 hours trying to come up with a cost basis of her AT&T stock before her tax guy and I concluded she can't sell your AT&T and spin offs while she is alive. Now I face the prospect I having to figure this out once again after her death ugh.

Well, it's a lot easier to establish the basis when the owner dies.

If it's necessary to find the basis before then (to avoid the estate tax!), an entire cottage industry has sprung up around valuing long-term shares like AT&T. This question has come up many times over the last couple decades and the database has essentially been rebuilt from scratch. If you have good copies of the original certificates (or as little as their dates of purchase), a stockbroker should be able to recommend a specialist to track down all the values and splits and divestitures. Maybe FinanceDude or Saluki or Brewer know who to call.

Berkshire did declare a small dividend in 1967, but Buffett claims it's because someone voted the issue while he was on a bathroom break.

 

[Martha]

I am thinking of all these $10,000, $50,000, $100,000, $500,000 estates that would now have tax issues where taxes where there were no issues before. Imagine relatives trying to figure out the basis in assets. Gee, when did they buy this stock? What does all this paperwork mean? What are the adjustments to basis for their home?

Ordinary people with ordinary sized estates are going to have a bitch of a time.

 

[ERD50]

That is a red herring Martha.

Repealing the estate tax, and/or raising the exclusion and/or lowering the marginal rate does not mean that we need to add capital gains taxes to estates below the exclusion.

Try again.

-ERD50

 

[Martha]

Red herring? If there is no estate tax, there would be no exclusion. So not only do you want to repeal an estate tax, you want to have a step up in basis? You would need a whole 'nother law for that.

What about gift taxes?

I am kind of getting tired of this discussion, so if I don't post anymore it doesn't mean I agree with you.

 

[ERD50]

There are many ways the estate tax could be modified w/o adding cap gains tax to estates below $1M or $5M or whatever.

You seem to be constructing complex alternatives in order to justify the status quo.

Here's just one alternative (I'm not saying it is the best, but that it can be done w/o putting the burden you mention on a $100,00 estate) :

$2M exclusion. 35% rate above that. No Cap gains on any estate.

There, no cap gains burden on a $100,000 estate. Simple.

IF that was not revenue neutral, keep eliminating loopholes until it is, or if needed, raise taxes on the high income living until it is. I can give an example later on why this discussion has actually drawn me towards elimination rather than adjustment...later.

Think 'Henry David Thoreau' - simplify! simplify!

-ERD50

 

[Martha]

Oh good. To settle this, I will take the $2M exclusion and 35% rate. I would prefer an progressive rate but I'll live.

I think you are drawn to elimination because you want to be and you were reading sources that supported your conclusion.

Life is simple for those who want it to be simple. If you lead a complicated life, expect complications. And if Bill and Melinda Gates save big on estate taxes by establishing a foundation, more power to them, the foundation does good work.

And that's all she wrote.

 

[samclem]

I understand the "taxes can be as simple as you want them to be" ratioale, and it sounds okay on the face of it ("if you want to save money on taxes, you can do t by engaging in complex, expensive machinations. Otherwise, just pay the tax. Hey, it is your choice!")

Here's what s wrong with a tax code that is set up this way:
- If you don't hop through all the complex hoops, you are a chump--you are paying more tax than you would otherwise owe.
- If you are poor/middle class, you likely
a) Don't even know about the available tax dodges.
b) Cannot take advantage of them at your income level.
c) Cannot afford the "overhead" (time and money) to hire lawyers, set up foundations, restructure your savings, etc.

I can't understand how it is possible to favor progressive tax rates (which are designed to make the wealthy pay more taxes) while simultaneously defending the existence of complex loopholes/wealth sheltering schemes which allow the wealthy to avoid taxation. I can think of only two groups who benefit from this schizophrenic "tax more but give them ways to avoid the taxes" structure: CPAs and attorneys.

The cost of the complexity is staggering:
-- Direct costs to individuals and corporations (see lawyers and CPAs above)
-- Indirect costs caused by disruption in efficient use of capital
-- The unquantifiable but real effects on the relationship between citizens and their government. The corrosive influence of our present taxation is manifest in a citizenry who believe they are being rooked by their government and who justify cheating by the fact that nobody can really identify the true amount of taxes owed.

Or, maybe things are just fine as they are. "Everybody gets their little breaks, be happy with your trifle and shut up!" Ha.