Buffett on estate taxes

[Martha]

Apples and oranges, IMO. The reason some on-line purchases do not get reported is because it is a state-by-state tax, not a Federal tax. And if the company has a business presence in my state, I get hit with the tax, itis automatic - no way around it.

Missing my point. If the company doesn't have a presence in your state, do you pay the tax? Do some people buy online just to avoid the sales tax? Sure do.

All taxes are subject to influence by special interests. But more to the point - are expensive strategies utilized by the super-wealthy more often to avoid estate taxes or to avoid sales taxes? Well, I can't remember anyone offering me a free dinner to explain their system for assuring me that I could pay less in sales tax, and therefore have more money to pass to my heirs.

-ERD50

The wealthy spend time trying to minimize all taxes. Actually, many don't spend the time and I know a number of wealthy people who could easily reduce their tax burden with some more planning.

The safety net in the US is full of holes. I have a relative that is 21 years old. She is borderline employable has a job with no health insurance but got some needed medication through a program in her state of residence for small copay. Now that program changed and she can't get the medication. Her drug bills without assistance would be about $700 a month. She has unpaid hospital bills exceeding $50,000. No possible way she can pay. We are struggling to figure out what to do and what other resources might be available. She must have her medication. She does not qualify for medical assistance because she isn't disabled.

This story is repeated over and over throughout the country. Many people in her position give up, don't take their drugs, and end up in the hospital.

 

[Martha]

I agree with your observations, however...

I just feel uncomfortable with the idea that I (in the form of the govt) should tell the person that earned the money, how best to distribute it. If they earned it legally, paid all the legal taxes in the process, I just think it should (for the most part), end there.

It won't end there. If the estate tax goes, we will have to just collect the taxes while you are alive.

I think it's the 'good for the goose, good for the gander' principle. I don't want someone telling me what to do with my money, why should I be able to tell them, just because they were better at accumulating than I? Sounds like 'sour grapes' to me.

Someone is always telling us what to do with our money. Feed, clothe and shelter your children or have them taken away. Pay rent or the mortgage or get kicked out of your home. Buy a nice suit because the job requires it. Pay property tax and support schools for children you don't have. Pay income taxes to support wars you don't believe in. Pay taxes to finance a safety net. Sour grapes? Do you know any really poor people? I don't hear a lot of sour grapes. Many poor people I know blame themselves for all their inability to be successful.

As far as the '3 generations' comment - that is often true. So why not just let nature take it's course? If the billionaire DID drive home strong values, maybe that money has a good home?

Historically, when nature took its course, some people got very very rich and the rest were poor.

I don't buy the 'encourages charitable giving' line. If I don't give to charity, the heirs keep half the money, half goes to estate taxes. If I do give to charity, it ALL goes to charity, heirs keep nothing. All that says is the donor thinks that the charity is a better home for the money than a 50-50 split between govt/heirs. I think that says a lot about what people think of the govt.

-ERD50

Give to charity all money over the estate tax exception and the rest to your heirs. There you go, no money to the government and very little planning required.

 

[ERD50]

RE: State sales Tax:

Missing my point. If the company doesn't have a presence in your state, do you pay the tax? Do some people buy online just to avoid the sales tax? Sure do.

I fully understand that people can and do buy out-of-state to evade the state sales tax. I still say apples/oranges - two diff taxing districts, the logic does not extend to the federal estate tax. At any rate, that form of state sales tax evasion is available to pretty much everyone, whether they are middle-class, wealthy or super-wealthy.

The safety net in the US is full of holes.

This story is repeated over and over throughout the country. Many people in her position give up, don't take their drugs, and end up in the hospital.

First, I'm sorry to hear of your relatives problems. But this is kind of changing the topic from how taxes are collected to how social programs are implemented. Yes the govt needs to collect $X to provide services. I'm just saying that I view an estate tax with loopholes as a poor way to collect it. Actually, your example points out some of the problems with govt run programs, but that's another topic...

It won't end there. If the estate tax goes, we will have to just collect the taxes while you are alive.

Yes, without changes in spending, they will need to find another way to collect that 1.4% of revenue. Again, better ways than the estate tax w/loopholes, IMO.

Historically, when nature took its course, some people got very very rich and the rest were poor.

That may be, I was just responding to the comment from Hamlet that wealth disintegrates in three generations.



RE:I don't buy the 'encourages charitable giving' line.

Give to charity all money over the estate tax exception and the rest to your heirs. There you go, no money to the government and very little planning required.

If someone is super-rich and the goal is to pass the maximum to their heirs, charitable donations would be discouraged by the rules you point out. How about a simple example with simplified rules just to get the point across?

Assume the estate tax exclusion is $1M and everything above that is taxed at 50%.

Mr MoneyBags has an $11M estate. One heir; a brat daughter that he wants to leave as much as possible to, because he thinks she is an angel.

A) Bequeaths no money to charity. The $1M exclusion passes to the brat tax free. 50% of the remaining $10M goes to estate taxes, leaving brat with $5M and the $1M exclusion. Brat gets $6M.

B) Bequeaths $10M to charity. The $1M exclusion passes to the brat tax free. None of the remaining $10M goes to estate taxes or to the brat, it all went to charity. Brat gets $1M.

The choice is really, 'do I give half to the govt and half to heirs OR all to charity and none to heirs' (or some blend of the two). I guess there are more advanced strategies around this, but now we are back to loopholes for the super-wealthy, with that 'strategy' money going to the financial planners instead of to social programs which is where I thought you wanted it to go? And the more modestly rich get hit with the full bill.

So yeah, I think the estate tax is lousy policy.

-ERD50

 

[Martha]

Well, if you are so worried about ways to minimize estate tax, what you call loopholes, get rid of them.

My worry is class mobility. With that we will have to disagree.

 

[ERD50]

OK, we will tax you now while you are still alive.

I support the estate tax. Already we have a big problem in the US with declining class mobility. I think of it as the Paris Hilton tax.

My worry is class mobility. With that we will have to disagree.

Maybe we don't need to disagree. According to these sources (most from the Clinton administration), getting rid of the estate tax should HELP level the field.

There's a ton of interesting material there. Here's just a few tidbits, emph mine:

The Economics of the Estate Tax

One of the more compelling arguments on the inequality aspect of estate taxation was prepared by Alan Blinder, a former member of the Federal Reserve Board appointed by President Clinton. In his book, Toward an Economic Theory of Income Distribution, Blinder attempted to decompose income inequality into its root causes, ....

Contrary to conventional wisdom, Blinder found that...

[E]state taxation is not a very powerful weapon in the egalitarian arsenal.... The reformer eyeing the estate tax as a means to reduce inequality had best look elsewhere.

Another critical analysis of the estate tax was prepared by Joseph Stiglitz, who served as Chairman of President Clinton's Council of Economic Advisers. ..... Stiglitz found that the estate tax may ultimately cause an increase in income inequality.

The conclusions reached by Blinder and Stiglitz have been replicated by numerous other researchers.

A survey of public opinion polls about wealth and income reveals that most Americans continue to view and support the concept of America as a land of opportunity. .... Even at the lowest income levels, a majority of Americans continue to support the opportunity to accumulate wealth.

-ERD50

 

[Martha]

Nope, still believe in the estate tax, polls notwithstanding. And the research is mixed.

Actually, if you explain to people the estate tax exemption, far fewer people oppose repealing the tax (sorry, no link). A number of people misunderstand the tax and think far more people have to pay it than do have to pay it.

Also, people's opinions change when they are given a choice of raising taxes on higher income earners versus an estate tax.

People love to say how our country is a land of opportunity. Why then is our class mobility less than most European countries?

 

[youbet]

Nope, still believe in the estate tax, polls notwithstanding. And the research is mixed.

Actually, if you explain to people the estate tax exemption, far fewer people oppose repealing the tax (sorry, no link). A number of people misunderstand the tax and think far more people have to pay it than do have to pay it.

Also, people's opinions change when they are given a choice of raising taxes on higher income earners versus an estate tax.

People love to say how our country is a land of opportunity. Why then is our class mobility less than most European countries?

Martha,

Would you support the elimination of the loopholes, workarounds, contengency clauses, etc., for estate taxes so that everyone who had an estate bigger than $X had to pay some percentage of the amount over $X ?

Like you, I'm concerned about the concentration of wealth and lack of class mobility in our country today. But it seems that with estate taxes, it's primarily the barely wealthy who actually suffer significant consequences. The super wealthy can afford the elaborate workarounds that wind up being built into the system.

 

[Hamlet]

I'm with you, but all taxation faces the same issue. My first choice over ALL taxes is to reduce government spending to the absolute minimum. My preferred minimum would be much lower than the vast majority of Americans would support. I oppose Social Security, Medicare, the Department of Education, farm subsidies, etc. So if you recommend cutting a Federal program, I am probably with you.

If the rest of America opposes cutting spending, however, we are left with the choice of how to collect our tax revenue. I dislike all the other taxes more than the estate tax. Most of them make it that much harder to accumulate wealth in the first place. I would rather pay my taxes after I'm dead

What tax would you raise to offset the revenue loss of cutting the estate tax?

I agree with your observations, however...

I just feel uncomfortable with the idea that I (in the form of the govt) should tell the person that earned the money, how best to distribute it. If they earned it legally, paid all the legal taxes in the process, I just think it should (for the most part), end there.

I think it's the 'good for the goose, good for the gander' principle. I don't want someone telling me what to do with my money, why should I be able to tell them, just because they were better at accumulating than I? Sounds like 'sour grapes' to me.

 

[youbet]

What tax would you raise to offset the revenue loss of cutting the estate tax?

My preference would be to collect more federal income taxes by eliminating loopholes, but with no rate increase. Simply go through the tax code (I know, "simply" and "tax code" is an oxymoron) and cross out loopholes designed to be behavior modification tools until 1% more tax is actually being collected.

 

[ERD50]

Actually, if you explain to people the estate tax exemption, far fewer people oppose repealing the tax (sorry, no link). A number of people misunderstand the tax and think far more people have to pay it than do have to pay it.

Also, people's opinions change when they are given a choice of raising taxes on higher income earners versus an estate tax.

And was it explained to that group how the 'super-wealthy' take advantage of loopholes? They might view it differently with that info.

. Why then is our class mobility less than most European countries?

I'm sure that is a very complex issue. But I bet the fact that our country enslaved some of it's population just ~ 150 years ago, and only formally started to protect their rights ~ 50 years ago, and kept another group of them on reservations has something to do with it. I suspect there is a pretty strong correlation between the poorest-of-the-poor and those groups. Those are some pretty deep-seated problems.

Rather than go into it point-by-point (while I should be prepping for company tomorrow), maybe just a little perspective will help:

I guess I just get defensive when the 'solution' to every problem seems to be to 'throw money at it'. Social ills? - let's get money from the 'rich'; etc, etc, etc.

I think it's fair to say that the govt, in general, is in the 'left-hand-not-knowing-what-the -right-is-doing' mode more than private corporations (they have their share though). I've seen corporations get into the 'throw money at it' approach, and it seldom works. It often prolongs the problem - with all those resources, surely we will fix it, so people tend to gloss over the real root causes. Often, after all the money throwing, some brave soul digs in and does the hard work of uncovering the root causes (which sometimes were ignored, because it might point out something embarrassing about some powerful group), and the problem gets solved quickly, with little expense.

I'm not saying our social ills can be fixed easily, but I am saying that I am very skeptical of 'money throwing'.

It reminds me of the Dilbert cartoon - the pointy-haired boss asks how to get the behind-schedule program back on track. The engineers have a long list of issues that would require the boss to make hard decisions and display real leadership. He keeps humming and hawing. Finally, out of frustration, Dilbert says 'We need faster computers'. Of course, faster computers won't solve the deep-seated organizational problems of the program, but it is something the boss can do by just allocating budget. The boss is *thrilled* and approves the expenditure for new computers, and walks away congratulating himself for 'solving' another tough problem!

What tax would you raise to offset the revenue loss of cutting the estate tax?

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

 

[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

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]

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]

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.

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

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]

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]

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]

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]

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.