NY Times Editorial on Changes to Estate Tax

[Danmar]

no taxes on lotteries in Canada. If there was was people would want to deduct the cost of tickets as a business expense right? Seems to me to make much more sense just to tax income (including cap gains) rather than estates. otherwise a real disincentive to save?

[kcowan]

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Originally Posted by Danmar ... otherwise a real disincentive to save?

I don't think so. Everyone needs to look after themselves. To create enduring value for offspring, there are established techniques to preserve estates. The same techniques used to dodge capital gains also help with estate taxes.

If the exemption level is set large enough, it will not impact the average family.

[ERD50]

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Originally Posted by kcowan Quote: Originally Posted by Danmar : ... otherwise a real disincentive to save? I don't think so. Everyone needs to look after themselves. To create enduring value for offspring, there are established techniques to preserve estates. The same techniques used to dodge capital gains also help with estate taxes. If the exemption level is set large enough, it will not impact the average family.

In other words, it's not REALLY a tax, it's a work program for some lawyers and accountants and insurance people.

-ERD50

[kcowan]

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Originally Posted by ERD50 In other words, it's not REALLY a tax, it's a work program for some lawyers and accountants and insurance people. -ERD50

Yup and there is no way around it as long as there is a capital gains tax. Estate taxes just add insult to injury...

I wonder how many estates actually pay any taxes?

[ERD50]

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Originally Posted by kcowan Yup and there is no way around it as long as there is a capital gains tax. Estate taxes just add insult to injury... I wonder how many estates actually pay any taxes?

The number is posted in this thread, 14,700, I assume that is correct.

A much more interesting number (that we cannot google) would be how much Estate Tax was not paid, due to hiring lawyers, accountants, etc.

-ERD50

[youbet]

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Originally Posted by ERD50 A much more interesting number (that we cannot google) would be how much Estate Tax was not paid, due to hiring lawyers, accountants, etc. -ERD50

+1

At the risk of sounding like a one note song, I'll again say that my opposition to the estate tax is that it's a tax so obviously established by lawyers in the public sector to provide work for lawyers in the private sector.

I again refer everyone to the concurrent thread where the OP asks about reducing estate taxes on his friends $10 million estate. The popular advise: "see a good lawyer."

If we're going to have an estate tax, then so be it. But make it simple and unavoidable regardless of the amount you pay to lawyers, CPA's, etc.

I can't understand those who want an estate tax but also want work-arounds. Is a matter of wanting others to pay the tax but feeling you'll be smart enough to avoid it?

[Texas Proud]

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Originally Posted by youbet +1 At the risk of sounding like a one note song, I'll again say that my opposition to the estate tax is that it's a tax so obviously established by lawyers in the public sector to provide work for lawyers in the private sector. I again refer everyone to the concurrent thread where the OP asks about reducing estate taxes on his friends $10 million estate. The popular advise: "see a good lawyer." If we're going to have an estate tax, then so be it. But make it simple and unavoidable regardless of the amount you pay to lawyers, CPA's, etc. I can't understand those who want an estate tax but also want work-arounds. Is a matter of wanting others to pay the tax but feeling you'll be smart enough to avoid it?

I agree with this thinking.... but this kind of thinking also applies to income taxes... We spend BILLIONS of dollars to people trying to avoid taxes.. it will not change anytime soon as the lawyers that make the laws also know that they will have a job when they leave public service...

[Martha]

Lawyers or no lawyers, people try to avoid taxes.

The estate tax isn't complicated. What is complicates things is giving stuff away before you die.

[SunsetSail]

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Originally Posted by youbet +1 At the risk of sounding like a one note song, I'll again say that my opposition to the estate tax is that it's a tax so obviously established by lawyers in the public sector to provide work for lawyers in the private sector. I again refer everyone to the concurrent thread where the OP asks about reducing estate taxes on his friends $10 million estate. The popular advise: "see a good lawyer." If we're going to have an estate tax, then so be it. But make it simple and unavoidable regardless of the amount you pay to lawyers, CPA's, etc. I can't understand those who want an estate tax but also want work-arounds. Is a matter of wanting others to pay the tax but feeling you'll be smart enough to avoid it?

I'm against an estate tax also but for different reasons. No one with an estate under $1 million will pay Federal Estate tax next year. With very simple and relatively cheap planning (under $5K for highly competent attorneys in the Los Angeles area) that exclusion can be effectively doubled to $2 million for a married couple (living trust with a credit bypass provision). There is essentially no federal level estate tax for most people. (This is under a whole bunch of assumptions such as a fully preserved unified credit, etc. but it still applies for most people). This expansion of the exclusion isn't a pay $5K save tax deal; the tax savings is a relatively minor adjustment for an estate plan that was made for non-tax reasons.

Most of the cost of estate plans for estates worth under $5 million are provisions not related to tax - avoidance of probate, how the estate should be distributed, limitations on distribution of the estate, preservation of wealth to biological children in the event of re-marriage, guardianship, etc.

I don't disagree that the system is too complex, but it doesn't really apply to the tax aspect until you get into large estates. Once you get into large estates, a major component of the complexity of tax planning involves maintaining control and avoiding tax. It isn't that complicated to plan for the tax part alone if one is willing to give up control of their money before they die.

I think the problem is that there is so much more involved in estate plans that just the tax aspect.

[ERD50]

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Originally Posted by Texas Proud I agree with this thinking.... but this kind of thinking also applies to income taxes... We spend BILLIONS of dollars to people trying to avoid taxes.. it will not change anytime soon as the lawyers that make the laws also know that they will have a job when they leave public service...

Two wrongs don't make a right (and I don't think you were saying they do) - at the minimum, let's simplify taxes to the point that if someone makes $X, we have a fairly good idea that they pay taxes within a fairly narrow range. With nothing that any lawyer or accountant could do about it.

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Originally Posted by Martha Lawyers or no lawyers, people try to avoid taxes. The estate tax isn't complicated. What is complicates things is giving stuff away before you die.

I started to reply, but it didn't come out very nice - I guess I'll use some restraint and maybe think it over and post later...

-ERD50

[ERD50]

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Originally Posted by SunsetSail Once you get into large estates, a major component of the complexity of tax planning involves maintaining control and avoiding tax. It isn't that complicated to plan for the tax part alone if one is willing to give up control of their money before they die.

And this where all the hypocrisy slips in, IMO. Those in favor of Estate Taxes talk about how we need to redistribute wealth, how the rich can afford it, it was just luck anyhow, and they shouldn't be allowed to pass much to their kids because that just creates modern monarchies.

Yet, the richest (who would contribute the most to our deficit) are the ones that can pay to avoid a large part of it. It's actually quite a contradiction (though legally correct) to say they "gave up control" of their money, if it is eventually getting used just as they wished (passed onto others through irrevocable trusts, etc). Why pay someone to set it up so that you "give up control" when the govt will do that for you free of charge?

IOW, they didn't give up control in a practical sense, only in a legal sense. edit/add: And that is not a 'loophole' it is how Congress wrote the law. Writing laws happens to be their job, they ought to pay attention to it (and I think they do, these rules have a purpose, they are not 'unintended consequences', they are the 'consequences'.)

-ERD50

[Texas Proud]

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Originally Posted by Martha Lawyers or no lawyers, people try to avoid taxes. The estate tax isn't complicated. What is complicates things is giving stuff away before you die.

But that is the point... why would I want to give things away before I die Only to avoid the estate tax... if there is no estate tax your complication goes away...

[Texas Proud]

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Originally Posted by SunsetSail I don't disagree that the system is too complex, but it doesn't really apply to the tax aspect until you get into large estates. Once you get into large estates, a major component of the complexity of tax planning involves maintaining control and avoiding tax. It isn't that complicated to plan for the tax part alone if one is willing to give up control of their money before they die.

Just like I said to Martha... why should I give up control In this discussion the ONLY reason I am giving up control is to AVOID TAXES... remove the tax and I do not have to give up control...

Sure, there are other reasons to give up control, but they would still be there with or without a tax....

[youbet]

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Originally Posted by Texas Proud I agree with this thinking.... but this kind of thinking also applies to income taxes...

Yep, no argument from me on that. I was just trying to keep on point......estate taxes.......with my comments. Income taxes also fall into the category of "why do we legislate a tax and also include a work-around if you have the right legal and accounting help to get you through the mountain of paperwork?"

It's such a waste of resources that could be applied to helping the poor or disadvantaged.

[Martha]

Clearly I was too flip. I wasn't making a policy argument, just stating where the complications are. The complicating factors are not the tax but the efforts to minimize the tax. Most of those efforts involve gifting programs. Some of this is perfectly hunky dory, but some are questionable. For example, forming limited partnerships to hold your assets and then giving away shares to family. The shares are valued low because they are not marketable. The issue is whether this is just tax avoidance or has other planning purposes. (I don't know the status of the law on these family limited partnerships). Others give non-voting shares in their businesses as the non-voting shares also are valued less than voting shares. Somewhat complicated ways to move things to the next generation, without changing control, and fix the value at a certain point in time.

So, the issues are whether these ways of minimizing taxes include loopholes that should be closed, whether these are perfectly fine gifting programs, or whether you even want a estate tax at all, and what people believe is fair based on their own values.

Work for estate planners and insurance salesmen? So what? You already need the will and maybe a trust. When you get in the top 5 percentile of wealth your life may be made more complex when estate planning. Lots of things complicate life. You own rental property, your tax situation suddenly is a lot more complicated. You own a business, there are many things that will complicate your life. Estate planning just isn't that big of a deal in the scope of the many things that complicate one's life.

Could resources be put to help the poor and disadvantaged? I wish. No one ever commits to doing that. Exactly how much resources are we talking about and from whom? OK, say we eliminate the estate tax. How is that going to help the poor and disadvantaged? I agree that we waste resources. That may be the nature of any society with competing and diverse interests. If we tax, people will want to avoid being taxed. Don't bet that simplicity will make things better. I don't.

[MichaelB]

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Originally Posted by ERD50 And this where all the hypocrisy slips in, IMO. Those in favor of Estate Taxes talk about how we need to redistribute wealth, how the rich can afford it, it was just luck anyhow, and they shouldn't be allowed to pass much to their kids because that just creates modern monarchies.

171 posts of vigorous debate on estate tax and no one mentions this need to redistribute wealth as the justification for the estate tax. Martha has consistently said it’s another transfer to tax

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Given that we as a society taxes transfers I see no reason to exempt transfers on death

I view it as a substitute for taxing the asset gains and income to the recipients.

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Double taxation applies to the same income and the same individual, not the same income and another individual. Why should one person be allowed to receive income and pay no tax while another receives and pays

There is no hypocrisy in either of these two arguments.

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Originally Posted by ERD50 [Yet, the richest (who would contribute the most to our deficit) are the ones that can pay to avoid a large part of it. It's actually quite a contradiction (though legally correct) to say they "gave up control" of their money, if it is eventually getting used just as they wished (passed onto others through irrevocable trusts, etc). Why pay someone to set it up so that you "give up control" when the govt will do that for you free of charge?

The two richest (Gates and Buffet) have been quite supportive of the estate tax, do not appear to have engaged in any evasive tactics and have chosen to use their assets for the benefit of humanity.

This is not about lawyers. Our society encourages individuals to work to accumulate unlimited assets. Great. They can give some away (quite a lot,actually) without any impediment or tax. But it does not allow them to give away unlimited amounts of assets without any tax being paid (with the notable exception of charitable giving). Our society wants people to work to earn the assets. The only thing “lost” here is the right to enjoy tax free unearned income for select individuals who in no way contributed to the accumulation effort.

[SunsetSail]

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Originally Posted by Texas Proud Just like I said to Martha... why should I give up control In this discussion the ONLY reason I am giving up control is to AVOID TAXES... remove the tax and I do not have to give up control... Sure, there are other reasons to give up control, but they would still be there with or without a tax....

Keep in mind that non-tax estate planning issues came first. When Congress decided it wanted another source of revenue, it enacted a law that created a tax system that needed to conform to the intricacies of estate planning in 48 states. Remove the tax and that other complexity is still there. You're right that elimination of the tax will simplify the process, but most people with an estate large enough to be subject to the tax will still need an attorney to help with their estate plans.

I am against the tax but in fairness to both sides of the argument I don't think elimination of the tax will remove the need for attorneys, CPA and similar professionals related to the estate planning process.

My argument against that tax is that I am okay with the concentration of wealth. I've had family offices as former clients where each individually started literally hundreds of businesses employing thousands of people. I think concentrated wealth provides some benefits to society. We aren't dealing with a zero sum game. Wealth is created; it is not a finite resource to be distributed - even if the body distributing it is an ultra benevolent and ultra efficient government...

[SunsetSail]

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Originally Posted by Martha For example, forming limited partnerships to hold your assets and then giving away shares to family. The shares are valued low because they are not marketable. The issue is whether this is just tax avoidance or has other planning purposes. (I don't know the status of the law on these family limited partnerships).

I don't know all the details, but FLPs still work. The allowable discounts are much smaller than before and must bear much greater IRS scrutiny. I also believe they are more susceptible to transfer collapse under a lack of economic substance challenge (as you noted was the issue). The practical effect is that they now require a much larger estate for it to be worth jumping through the hoops, or of course a 'true' non-tax avoidance purpose.

[Texas Proud]

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Originally Posted by SunsetSail Keep in mind that non-tax estate planning issues came first. When Congress decided it wanted another source of revenue, it enacted a law that created a tax system that needed to conform to the intricacies of estate planning in 48 states. Remove the tax and that other complexity is still there. You're right that elimination of the tax will simplify the process, but most people with an estate large enough to be subject to the tax will still need an attorney to help with their estate plans. I am against the tax but in fairness to both sides of the argument I don't think elimination of the tax will remove the need for attorneys, CPA and similar professionals related to the estate planning process. My argument against that tax is that I am okay with the concentration of wealth. I've had family offices as former clients where each individually started literally hundreds of businesses employing thousands of people. I think concentrated wealth provides some benefits to society. We aren't dealing with a zero sum game. Wealth is created; it is not a finite resource to be distributed - even if the body distributing it is an ultra benevolent and ultra efficient government...

Maybe... maybe not... many people (including very rich people) die without a will... they just don't think they will die...

What I am getting at is all the transfer of asset schemes that are being done to try and avoid a very high tax bill... and then in the future the law can change and make that scheme a horrible decision...

As an example... over 20 years ago my mother bought a single premium annuity with a life insurance component... and with it here estate was getting close to the taxable amount (remember it was way less than $1 mill back then)... so, we got it moved to a trust... she made almost every living decendant a beneficiary in the trust (gift tax reasons)... now 20 plus years later we are still stuck with it... the cost to unwind this (and I have not checked to see if we could) is not cheap... but she has nowhere near the estate value that would be taxable today (this trust asset would easily be the biggest asset in her estate)....

It would have been much easier to not have done anything and allow her to distribute her assets via her will when she dies...

[SunsetSail]

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Originally Posted by Texas Proud Maybe... maybe not... many people (including very rich people) die without a will... they just don't think they will die...

I'm not sure to what part of my post your "maybe...maybe not" applies. Very rich people die without tax planning also. My point is just that if you do want to plan your estate not all the complexity is housed within the tax component of an estate plan. I think our only point of disagreement is the degree of complexity associated with the tax part which has a high level of subjectivity.

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Originally Posted by Texas Proud As an example... over 20 years ago my mother bought a single premium annuity with a life insurance component...

I don't mean to be disrespectful, but it sounds like your mom may have been given some poor advice, but maybe not because each situation is so fact specific.

An example to my point is when my wife became pregnant with our first child I had us both draft holographic wills naming guardians of the child. When our second child was born (presumably our last) we formalized an estate plan. However, we decided that we did not want to avoid probate because we specifically wanted a judge to review our estate to ensure our wishes were carried out. We also have specific instructions as to the administration of the funds in our estate and when our kids can have access. The decision limited our ability to plan for tax savings (although subsequent trustees have the authority for tax planning). Once our kids become adults we will change it to be more tax efficient, but for now our concern is that the guardianship of our kids is handled the way we want. The end result is a fairly complex estate plan with no tax planning.

There may be a society bias to think of estate planning as something that one does when the sun is setting on the horizon. At that point the tax planning typically does become a more important or at least more prominent component. However, it is my opinion that it is far more important to plan your estate when you have young kids in which case tax considerations are not necessarily as important.