NY Times Editorial on Changes to Estate Tax

[Texas Proud]

After looking through / reading 87 posts in this thread, I find the whole conversation somewhat humorous. Those of us with estates large enough to suffer an adverse death tax will turn to our accounting and legal advisers to find ways to avoid or minimize the impact. To us the bigger "cost" of the government's desire to invoke an estate tax is paying our advisers to identify ways to avoid the tax. Believe me, if you hire the right firm(s), there are many ways to avoid (and in some cases, safe ways to evade) the estate tax. The irony of the estate tax is that the more the government tries to take the money from the rich, the more the rich will spend on strategies to protect their assets, because we can afford the cost - it's simple economics. Will I tell you how I'm avoiding estate taxes? Hell no, I've paid too much for this information.

There are a lot of people who can not avoid the tax... and 'evade' is against the law... you can go to jail if you do that...


It seems that people who do not know taxes think that there is a way that the 'rich' can avoid all taxes if they hire the right lawyer or accountant.... that is just wrong...

Back when I did taxes (a LONG time ago)... we had a few clients who paid $10 MILLION per qtr for estimated tax payments... they paid us quite well, but there was just no way we could eliminate that kind of tax liability...

As I have mentioned before, if you are really really rich, you just get your congress critter to put in a loophole just for you... the Gallo family did it...

 

[Texas Proud]

I would much prefer that the unrealized gains on assets be taxed... or that the basis of an asset is passed on the the receipient...

That eliminates the estate tax... that eliminates all the money spent trying to avoid it... that eliminates all these trust that the gvmt has to deal with trying to avoid it... that eliminates having untaxed gains...

And I think it is a pretty big net plus to society...

If the family wants to continue the farm (this is if basis is passed)... they can... but if all the kids want to sell etc. they pay their cap gains tax...

At the end of the day I bet that the gvmt makes more money this way than they do with the estate tax... because it hits ALL estates for all untaxed gains....

 

[haha]

If our lawyer-Congress critter folks really believe in the estate tax, why do they provide work-arounds that are available if you pay big bux to law firms?

I think they don't "provide work-arounds" so much as fight rear guard actions against people who are smarter and more focused on this than they are.

Ha

 

[Martha]

It creates a problem for workers employed by businesses that are taken apart to pay this tax. I don't have numbers for their population, and I doubt anyone does.

I question this clearly speculative statement. Even in 2004, when the credit was 1.4 million, the percentage paid in tax just is not that high. [FONT=Arial, Helvetica]

Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent.[/FONT] FactCheck.org: Estate Tax Malarkey
[FONT=Arial, Helvetica]
[/FONT]Plus, not only can farms/small businesses pay over time, if the business is kept in the family for 10 years there is the ability to have the assets valued at its value as a farm or business, not what might be fair market value. This reduction can be significant, ranging from 40 to 70%, with a maximum of a million dollars in 2009 (currently moot).


http://www.factcheck.org/article328.html

 

[Martha]

At the risk of appearing petty and difficult - it has nothing to do with fairness. Loophole is a term of art and you used it incorrectly. I understand that you are opposed to these exclusions for many reasons and I respect your reasoning even if I disagree with it. My point is that they are simply not loopholes. They may be horrific exclusions from the tax base that stand to rip the very fabric of society, but they are not loopholes. A loophole is a legal way to avoid tax that was unintended by the legislature or drafting body.

From my short time here I know you are a highly respected and influential member of this forum. I just want to make sure that people understand that there are no deceptive practices going on with these exclusions and your opposition is from a policy standpoint.

You are right. Technically the word loophole does refer to an unintended consequence, not intended consequences. Correction accepted.

 

[SunsetSail]

I question this clearly speculative statement. Even in 2004, when the credit was 1.4 million, the percentage paid in tax just is not that high.

[FONT=Arial, Helvetica]Of the 440 taxable family farm and business estates in 2004, two out of five paid an average rate of only 1.6 percent. These were taxable estates valued at less than $2 million.Very large estates valued at over $20 million paid at an average effective rate of just over 22 percent.[/FONT] FactCheck.org: Estate Tax Malarkey

Plus, not only can farms/small businesses pay over time, if the business is kept in the family for 10 years there is the ability to have the assets valued at its value as a farm or business, not what might be fair market value. This reduction can be significant, ranging from 40 to 70%, with a maximum of a million dollars in 2009 (currently moot).

I agree with this one. I was involved in estate planning a few years ago and had access to nationwide surveys covering 30+ time periods about business failures related to the death of the person most involved in the business. The failures were almost always the result of no succession planning, fights between heirs for control, etc. but not a failure due to insufficient liquidity to pay estate taxes. The information was used for marketing estate plans, not tax planning although the two usually go together.

I still think the estate tax is bad from a philosophical standpoint and a practical desire to pass as much on to my children as possible, but I don't think the policy arguments are compelling either way.

 

[Martha]

I would much prefer that the unrealized gains on assets be taxed... or that the basis of an asset is passed on the the receipient...

Part of the problem is a record keeping problem. It can be hard to impossible to figure out the basis of assets that were not owned by you. My father (who didn't have a taxable estate but close to an insolvent estate) did not have good record keeping. Maybe I could have figured out the value of his home by the deed tax he paid when he bought it, but everything else, no way to know. I wonder how well this works in Canada and what exactly is included in the calculation. Grandmas teapot?

 

[kcowan]

I sure hope you guys get this all sorted out by Jan 1, 2011.

 

[youbet]

Part of the problem is a record keeping problem.

I'd rather have to figure basis values for significant parts of the estate than go through the agony and cost of dealing with law firms to take advantage of Congress provided work-arounds to escape the worst aspects of estate taxes.

I strongly agree with Texas Proud. Let's pay capital gains tax on our estates as they pass to heirs rather than washing those away. And let's eliminate estate taxes which over time have varying and seemingly arbitrary exclusions, rates and work-arounds.

I'm sure this will vary from person to person, but to me it would be a snap to keep records of the cost basis of the significant items making up my net worth (the house, stocks, bonds) compared to visiting a law firm to have the various estate tax work-arounds implemented by attorneys and CPA's.

 

[MichaelB]

I would much prefer that the unrealized gains on assets be taxed... or that the basis of an asset is passed on the the receipient...

That eliminates the estate tax... that eliminates all the money spent trying to avoid it... that eliminates all these trust that the gvmt has to deal with trying to avoid it... that eliminates having untaxed gains...

And I think it is a pretty big net plus to society...

If the family wants to continue the farm (this is if basis is passed)... they can... but if all the kids want to sell etc. they pay their cap gains tax...

At the end of the day I bet that the gvmt makes more money this way than they do with the estate tax... because it hits ALL estates for all untaxed gains....

Just as long as you tax the unearned income to the recipient like all other unearned income is taxed.

 

[Texas Proud]

Part of the problem is a record keeping problem. It can be hard to impossible to figure out the basis of assets that were not owned by you. My father (who didn't have a taxable estate but close to an insolvent estate) did not have good record keeping. Maybe I could have figured out the value of his home by the deed tax he paid when he bought it, but everything else, no way to know. I wonder how well this works in Canada and what exactly is included in the calculation. Grandmas teapot?

Good point... OK, let's give an exemption for a certain amount of 'gain' for unknown assets.. $500K... $1mill... whatever...

Right now, if you can not prove your basis it is zero... so if you inherit property and can not find the basis, it is zero... so if you sell it is 100% capital gain... (except for that exemption we are giving)....

 

[Texas Proud]

Just as long as you tax the unearned income to the recipient like all other unearned income is taxed.

Not a problem with me....

 

[youbet]

Just as long as you tax the unearned income to the recipient like all other unearned income is taxed.

To have this be apples to apples, isn't that something we should do under the estate tax scheme as well?

 

[youbet]

Good point... OK, let's give an exemption for a certain amount of 'gain' for unknown assets.. $500K... $1mill... whatever...

Right now, if you can not prove your basis it is zero... so if you inherit property and can not find the basis, it is zero... so if you sell it is 100% capital gain... (except for that exemption we are giving)....

I'd agree with some level of exemption to cover things like antiques, collectible, etc. Everything else would generally be easy. By law, you already have to know your basis for financial assets such as stocks and bonds. And your house already has an exemption built in, $500k I think. If I croaked this afternoon, my son would only need my Schwab password and everything he'd need would be at his finger tips. And, oh yeah, he has my Schwab password.

It's easy to give silly, off the wall examples of appreciated assets where estimating the basis would be difficult. But those cases are going to be in the extreme minority. An exemption level would take care of those.

 

[Independent]

I've read all the posts here and want to get my 2 cents in.

I look at the estate tax from the perspective of the living, not the deceased. I'd rather see a federal inheritance tax than a federal estate tax.

I don't buy any argument that sounds like "I have an absolute right to do what I want with my money." Sorry, living in a modern country means paying taxes.

I don't buy the "but we have to keep family businesses together" argument. If the value of a business is twice the standard estate tax exemption, and the tax rate on the excess is 50%, and people can spread the payments over 14 years, then the business has to generate free cash flow equal to 1.8% of it's market value to pay the tax. I'd like to see the financials of a business that can't do that.

I don't buy the "but the rich will always avoid it" argument. Sure, we all try to avoid taxes, but that doesn't mean we set tax rates at zero. The IRS watches what people do and closes down unintended loopholes (I won't get into a semantic argument here) as they come up. That's what we do with any tax.

I have some mild agreement with the "already taxed" argument. But I know a lot of the gains in big estates are unrealized capital gains that have never been taxed. More important, I pay Medicare, Social Security, Federal Income, and State Income taxes on my earned income, then I pay sales tax on those dollars when I spend them. That's kind of life.

I don't buy the notion that the money in large estates arises from incredibly hard work over a lifetime. I think that lots of people work very hard, much of the difference in result is luck. To a large extent, when we tax big estates were taxing extremely good luck, not hard work.

I do accept the notion that a democracy shouldn't have a hereditary "nobility". In fact, the US constitution prohibits granting titles in two places. IMO, great wealth is the modern equivalent of a titled class. Very wealthy people have advantages before the law because they can hire the best lawyers, they have advantages in making laws because they can make the big political contributions. I think it's beneficial to society that we break up those big estates. (One reason I prefer inheritance taxes. I'd rather see the deceased spread the estate among many people rather than leave it to one.) I think we should respect hard work, but to me that means our financial position should be based more on what we do an less on what our ancestors did.

 

[samclem]

I hope we're not talking about some kind of "exemption" or floor for the passing of this unearned income from generation to generation. Why would we do that? If the sentiment is "this is just income like every other kind of income, treat it that way" then we should be consistent. No exemption. When Mom dies and leaves her $75K house (purchased in 1965 for $15K) to Junior (who earns $20K per year), then Junior just received $60K in income (or tax it as LTCG). Likewise with the car and furniture. Or Dad's dry cleaning business. We've already got a very considerable personal exemption and a standard deduction. Junior, along with 47% of Americans, doesn't normally pay a penny in income taxes. But, this year he's firmly in the middle class. "Welcome to the big leagues, now pay your taxes and help us carry the load." We've already got progressive taxation, so Junior won't pay as much as a rich heir, but he's paying taxes on income like everyone else. If the taxes might be too much and he wants to keep Mom's house, I guess he should buy some insurance.

The more that taxes are focused on a few individuals ("Only the richest 1% are affected! Big deal!") the more we have a punitive arrangement. Let the burden fall lightly but broadly on all. In the bargain, "Junior" might come to have a more rounded opinion about the virtues of taxation.

 

[MichaelB]

To have this be apples to apples, isn't that something we should do under the estate tax scheme as well?

Taxing the unearned income after an estate tax would be taxing the same money twice, so it should be either the estate tax or tax the gains and unearned income.

Much of the argument against estate tax is philosophical - not against tax, just that method of taxing. Fair enough. Then eliminate the estate tax and then tax 1)unrealized gains on assets, and 2)unearned income to recipients. If the recipient is a tax free entity, such as a charity, they pay no tax. If it's the kids, then they pay taxes like any other unearned income.

Not a problem with me....

Then we agree. Go figure. I prefer the estate tax but can live with the alternative. Cheers!

 

[ziggy29]

This impacts a very small percentage of estates. If the additional revenue can go to funding public pensions or to make college more affordable then my only question is why is someone arguing the issue.

Surely no one with a public pension or wondering how to afford college would argue the issue. As the old saying goes, "Robbing Peter to pay Paul is sure to have the support of Paul."

 

[youbet]

Taxing the unearned income after an estate tax would be taxing the same money twice, so it should be either the estate tax or tax the gains and unearned income.

I guess we can just agree to disagree on that one. I think it would be taxing the same money twice in either case.

We're hypothesizing two cases:

The heir receives the residual of the estate after estate taxes are paid

The heir receives the residual of the estate after capital gains taxes are paid

I say if you're going to consider the residual amount as unearned income and taxable to the heir, it should apply to either. There would be no more "double taxation" to one than the other.

In any case, my only dog in this fight is that I'd like to see whatever tax system we use to dip into citizens' "leftovers" at death be straight forward and easy for the average citizen to understand and plan for without the use of expensive attorneys and CPA's.

 

[haha]

I guess we can just agree to disagree on that one. I think it would be taxing the same money twice in either case.

Not a problem for the government, it has already proven itself to be quite adept at this trick.

 

[ERD50]

Some good points, let me take a stab at 'em:

I've read all the posts here and want to get my 2 cents in.

I don't buy any argument that sounds like "I have an absolute right to do what I want with my money." Sorry, living in a modern country means paying taxes.

Mostly agree. There is no absolute right, it must be legal and of course we need to pay taxes to support some level of govt. But hitting a pile of money with a 55% (or whatever it is) rate all in one fell swoop just doesn't sit well with me. I'll try to touch on this later.

I don't buy the "but we have to keep family businesses together" argument. ... spread the payments over 14 years, then the business has to generate free cash flow equal to 1.8% of it's market value to pay the tax. I'd like to see the financials of a business that can't do that.

Whats the average profit margin of a business (I'll guess 8-10% range?)? I'd bet that 1.8% is a substantial chunk of it, just like we talk of an added 1% expense fee requiring us to have an added 25% in our nest egg for a 4% WR. And maybe what I'm about to say is a small number, but I'll repeat that doesn't make it right - maybe some of these businesses were on the edge. The owner just died, maybe he/she was instrumental in running the business, and this 1.8% for 14 years is the straw on the camel's back?

I don't buy the "but the rich will always avoid it" argument. Sure, we all try to avoid taxes, but that doesn't mean we set tax rates at zero.

I don't think too many here think it always turns to zero. But whatever is avoided is avoided. It doesn't change the argument.

I don't buy the notion that the money in large estates arises from incredibly hard work over a lifetime. I think that lots of people work very hard, much of the difference in result is luck. To a large extent, when we tax big estates were taxing extremely good luck, not hard work.

I have no idea what the break out is, obviously it some combination of all of the above. But I do find it offensive to lump them together. Clearly some of those who accumulated wealth did it through hard work, skill, education, vision, etc. And they created useful products and services and created jobs and overall were a real asset to society. Someone else won the lottery and goofed off.

There is no way for the tax code to differentiate "good" money from "bad" money. So let's not lump the good with the bad, they good might even be the majority, I don't know if numbers can capture this. And then we get into the crazy discussions of whether a sports star is "lucky" to be born with the physical attributes to play the game. To me, this lumping of the rich is no less offensive than saying that since poor people have higher rates of committing theft, we should start locking up all poor people.

If we want to make moral judgments on "good" money and "bad" money, I suggest we vote with our wallets and not broad brush tax code. I don't buy products from rappers that I find offensive, (add endless examples).

Very wealthy people have advantages before the law because they can hire the best lawyers, they have advantages in making laws because they can make the big political contributions.

Damn right they do! And they can buy fancy cars and villas and yachts! That's why so many aspire to be rich! And let's not forget that the vast majority of posters here are "rich" relative to the average US citizen, and "filthy rich" compared to your average third world citizen.

I think it's beneficial to society that we break up those big estates.

I'll go back to my broad-brush defense. We need proper laws and enforcement to prevent/punish wrongdoers. Someone with a lot of money can use it to do damage. A union with a lot of power can do damage. I want the damage stopped, I'm not going to pre-judge the class of people.

I think we should respect hard work, but to me that means our financial position should be based more on what we do an less on what our ancestors did.

Money is a resource. Setting a good example, exposing your child to books, music, the arts, sciences are other resources. Good parents try to pass these onto their children. When do we go in and decide that it isn't "fair" for a child to have the advantage of good parents? If I can't give my kids money, maybe I can't give them a good education or experiences either. It isn't "fair". The "fair" police don't want my kids to have anything that everyone doesn't get, whether I worked for it or not. I know that sounds silly, but it really is an extension of what you are saying.

-ERD50

 

[Nords]

I don't know about you guys, but I see the estate tax as a goal fo make sure that I keep spending/donating my assets as aggressively as possible. I don't want to be the guy who dies with the most toys, and I don't want to afflict my progeny with affluenza.

I sure hope you guys get this all sorted out by Jan 1, 2011.

My spouse says I don't need to worry-- she has it covered...

 

[youbet]

I don't know about you guys, but I see the estate tax as a goal fo make sure that I keep spending/donating my assets as aggressively as possible. I don't want to be the guy who dies with the most toys, and I don't want to afflict my progeny with affluenza.

As good an outlook as any Nords. But being for an estate tax without talking about exemption levels and rates doesn't mean too much.

What degree of estate tax are you pulling for that would keep you aggressively spending and donating? 50% with zero ememption? 55% with $1 mil exemption. 45% with $3.5 mil exemption?

It's all in the details.........

 

[ERD50]

I don't buy the notion that the money in large estates arises from incredibly hard work over a lifetime. I think that lots of people work very hard, much of the difference in result is luck. To a large extent, when we tax big estates were taxing extremely good luck, not hard work.

Allow me to step out of my 'Spock Suit' a minute, and address this on an emotional level.

Maybe I'm biased, or maybe my personal experiences have exposed me to more of the 'real truth' than many - I don't know. But I've seen what some of the people of my father and father-in-law's generation have produced. Many of them accumulated an estate in the process of doing good honest work, providing valuable goods and services for others. I wonder if they consider themselves "lucky" to be born during the depression, literally scrounging garbage cans for something to eat? But this "luck" instilled a certain level of work ethic in them, and the willingness to scrimp and save for a better tomorrow - things that led to them accumulating an estate (think of the scene from "Gone with the Wind" here - 'As God is my witness, ... I'm going to live through this and when it's all over, I'll never be hungry again. No, nor any of my folk....'). Or were they "lucky" to fight in a brutal World War, an experience that I also believe instilled certain values in them that helped them to be successful later in life - they paid a very high price for that "luck", including losing some of their friends and family. Or maybe my own father was "lucky" to have a life-long physical infirmity that kept him out of the service - he was able to get his business started while his buddies were off fighting, something I think he always carried some guilt over. I've seen how hard these people worked to make their businesses successful, they worked their asses off, and they sacrificed and they took risks that many people are afraid to take. And for most of them, it paid off. Just frickin' lucky I guess.

And it isn't just their generation. I've made casual acquaintances with a few very rich people closer to my age. Is someone who went from CEO of a Fortune 100 company to CEO of a Dow 30 company rich enough for you? This guy came from a modest background, but he got an education and he had the skills and work ethic to achieve these things. He's brilliant. He has more money than he knows what to do with (he's actually rather frugal!), yet, there isn't a bone in my body that makes me think I have the right to tell him what to do with his money. He earned it, it's his to do as he pleases.

So yes, I'm offended when people want to lump all people with an estate together as "lucky" and feel that they have a right to tell these people how to dispose of the money they earned, risked, and saved and scrimped for. You go out and do what they did, survive what they did, and then we will talk. Heck, even if it was dumb luck - what gives you the right to direct what they do as a result of their luck?

Disclosure and probably TMI: These estate laws might possibly affect my family, but only in a minor way at the most. And if those people came to me and said they have decided to leave their entire estate to a charity, I'd fully support them in that decision. It is their money to do with as they see fit. No hypocrisy from me. So I'm fighting the Estate Tax on principle. I just think it is wrong on so many levels.

OK, that's off my chest. As I mentioned in another post, today is a sort of anniversary for me, so the emotion runs a bit deeper. Spock post coming up next.

-ERD50

 

[Texas Proud]

I guess we can just agree to disagree on that one. I think it would be taxing the same money twice in either case.

We're hypothesizing two cases:

The heir receives the residual of the estate after estate taxes are paid

The heir receives the residual of the estate after capital gains taxes are paid

I say if you're going to consider the residual amount as unearned income and taxable to the heir, it should apply to either. There would be no more "double taxation" to one than the other.

In any case, my only dog in this fight is that I'd like to see whatever tax system we use to dip into citizens' "leftovers" at death be straight forward and easy for the average citizen to understand and plan for without the use of expensive attorneys and CPA's.

Not the same... and I will give an extreme example.... assume $5 mill exempt and a flat rate of 50% for ease of calcs... 20% LTCG rate...

Someone dies with a $10 mill estate.. if we have an estate tax then they have a $5 mill taxable estate and pay $2.5 mill.. heirs get $7.5... It does not matter what the basis of the asssets are... but they do get a step up in basis in this example.. (which brings up another subject... there could be a big or a small amount of untaxed gains etc... see next two examples... estate taxes do not care how much has not been taxed as the tax is not based on gains etc.... just asset size)


Now, say that all $10 mill has zero basis and we tax untaxed income/gains.... we then have to pay 20% of the $10 Mill and we pay $2 mill in tax.. heirs get $8 mill...

But let's say that the person had been renting... and was a day trader and all $10 mill had a basis of $10 mill.... then there IS no gain to pay taxes on and heirs get $10 mill...