NY Times Editorial on Changes to Estate Tax

[MichaelB]

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

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.

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.

[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]

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]

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]

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]

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.

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.

 

[Texas Proud]

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.


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.

I agree with what you are saying... that there are many people who do estate planning without regards to taxes... most of them do not have a tax problem because their estates just don't go that high... I am not trying to minimize all the planning that one should do for estate planning...

What I am trying to point out is that a lot of trusts and other legal entities are set up just to avoid the tax.... the 'owner' of the asset would not have given up even part of their ownership if there were no tax liability staring them in the face... because of the tax, people are doing things they do not want to do... the tax 'tail' is wagging the dog...

No, my mom did not get bad advice at the time... there were no plans to change the estate tax at the time... she was fast approaching a taxable estate... we wanted to lower her estate and not create a large tax liability... we did that... the things that have changed is the tax law... and my mom still going stong at 92 (hope she keeps going too...)... if she dies we do not have to pay any income tax on a large part of her estate as it will be converted to life insurance... (IOW, the growth in the annuity will never have been taxed)... that is significant in itself...

 

[SunsetSail]

What I am trying to point out is that a lot of trusts and other legal entities are set up just to avoid the tax.... the 'owner' of the asset would not have given up even part of their ownership if there were no tax liability staring them in the face... because of the tax, people are doing things they do not want to do... the tax 'tail' is wagging the dog...

I'll concede the point - you will eliminate measurable complexity and some economically unproductive activity with no estate tax. You will have to get the Texas Congresspersons to repeal the tax now without a sunset provision. We won't get any help from the California delegation, so I've done all I can.

Are we repealing the gift tax as well?

 

[Martha]

. . . I've done all I can.

As have I.

As this is a topic where none of the participants are likely to convince each other of their position, I think that I will sign off the discussion. At a point we become tiresome.

WS, I caught your post before the delete. Clearly we have very different views of how the world works and should work. But you knew that.

 

[youbet]

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.

Speaking of "the right to enjoy tax free unearned income," we need to get back to the question of life insurance. Both estate dollars and life insurance dollars are unearned income to the recipient. Should they be taxed the same?

I would think so. No matter how much the life insurance industry lobbiests pay the Congresscritters, I shouldn't be able to avoid estate taxes by converting assets to life insurance. JMHO.

I wonder what you think?

 

[youbet]

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.

I suppose this depends on how you look at the situation. I see two rich men who would rather give their money to charity while alive and enjoy the positive recognition and elevation of their public persona than have the money be transfered to the gov't via estate taxes at their death. If they supported estate taxes, then their action should be to retain their estates, do no legal mumbly-jumbly stuff, and turn over about 50% of their wealth to the gov't at their demise. I admire their charitable giving, but their giving is in no way an indication of their support of the estate tax. Quite the opposite.

In any case, the super rich are a different breed. They can give away 95% or more of their wealth and still leave their heirs well fixed by common standards. It's estates in the $2, $3 or $4 million range (with a $1 million exemption) that are really impacted.

It would make such a tiny difference in the amount of tax revenue collected if the feds moved the exemption to the $5 or $10 million range which would almost completely eliminate the issues of family businesses, etc. I don't see why they don't do that. The uber-wealthy like Buffet or Gates can do as they wish, still leaving their heirs in the top 0.01%, the "small time rich guys" would be exempted and all the bickering would go away.

 

[clifp]

I may have mentioned this idea in the past, but I was curious what people (especially an Attorney like Martha) thought about the basic idea of eliminating the estate tax, but instead taxing inheritances at the long-term capital gains rate.

To minimize paper work and allow most families to pass on modest estates tax free and make a couple of changes. I'd flip the current (except for 2010) unified lifetime gift exclusion and annual gift limits. Instead of taxing the person who gives more than $13,000 per year (indexed for inflation) or more than ~a couple million over their life, you can give away as much as you want but the recipient is taxed. In particular you can receive 13K a year in gifts /bequeaths from all sources in years (for instance due to inheritance) that you exceed that amount it applies to your lifetime exclusion. When you exceed that amount (I think a number like $2-$3 million is in the right ballpark) over your lifetime the gift is treated as long-term capital gain.

One of the benefits it would allow the Warren Buffetts (or much more likely the medium business owner with 50 or 100 employees) to leave their firm to their employees with no or minimal taxes. It would probably raise about the same revenue as the current system with 3.5 million dollar exemption but all of the fancy pass-thru trust, weird life insurance trusts etc.

Are there any obvious tax dodges I am missing?

 

[MichaelB]

Speaking of "the right to enjoy tax free unearned income," we need to get back to the question of life insurance. Both estate dollars and life insurance dollars are unearned income to the recipient. Should they be taxed the same?

I would think so. No matter how much the life insurance industry lobbiests pay the Congresscritters, I shouldn't be able to avoid estate taxes by converting assets to life insurance. JMHO.

I wonder what you think?

Separate life insurance into two parts. The one that is reimbursement for a loss should be tax free, like other types of risk insurance. Insurance payments that do no compensate for loss – such as your example above - would be taxable income.

I suppose this depends on how you look at the situation. I see two rich men who would rather give their money to charity while alive and enjoy the positive recognition and elevation of their public persona than have the money be transfered to the gov't via estate taxes at their death. If they supported estate taxes, then their action should be to retain their estates, do no legal mumbly-jumbly stuff, and turn over about 50% of their wealth to the gov't at their demise. I admire their charitable giving, but their giving is in no way an indication of their support of the estate tax. Quite the opposite.

In any case, the super rich are a different breed. They can give away 95% or more of their wealth and still leave their heirs well fixed by common standards. It's estates in the $2, $3 or $4 million range (with a $1 million exemption) that are really impacted.

It would make such a tiny difference in the amount of tax revenue collected if the feds moved the exemption to the $5 or $10 million range which would almost completely eliminate the issues of family businesses, etc. I don't see why they don't do that. The uber-wealthy like Buffet or Gates can do as they wish, still leaving their heirs in the top 0.01%, the "small time rich guys" would be exempted and all the bickering would go away.

Agree with the $5 to $10M suggestion.

As for Gates and Buffet, they speak only for themselves. I mentioned them just to respond to some posts that overgeneralize about what others think, feel or how they act.

Cheers...

 

[HFWR]

...all the bickering would go away.

 

[Ted_Shepherd]

Unrealized Capital Gains, IRA's

1. I already paid taxes on that money. Suddenly it becomes taxable again when I die?

2. It costs me plenty, $ and time, to tax plan and set up trusts just so DW and I can each leave an estate instead of having it combined into one estate for the surviving spouse, with one estate tax exemption applied.

3. It incentivizes me to spend the money before I die, rather than saving it in case I, or my family, need it late in life.

I have no problem leaving the tax basis of everything where it is, without the normal step-up. Although that does make it easier for the survivors. But this tax is just another money grab and a social wealth transfer.

I think the estate tax is a mistake, evidently costing the economy more than the government's revenues from it. Somewhere I read an estimate that enforcement of the estate tax costs 75% of those revenues. I would be glad to see the "death tax" abolished completely. I cannot work up any envy of the rich or their heirs. Still, the argument that tax has already been collected on a decedent's assets is not sound. My estate includes unrealized capital gains (including even gains on my Nevada house, but mostly in my stock market assets) and tax-deferred assets in my traditional IRA. That money has not been taxed. It is a non-trivial portion of my estate and, so far as I know, of many American estates. So, let me gently suggest that people not hurt a good cause with a fallacious argument.

Some people argued in support of the estate tax that it is the only tax on wealth. That is easily proven wrong by anyone with a property tax bill handy. If they mean that the estate tax is the only federal tax on wealth, let them say so explicitly so all us property tax payers can make our point. Further, inflation functions as a tax and reaches directly into tax-deferred accounts.

Some have argued that only a small percentage of estates owe any estate tax. The estate tax in fact influences the decisions of many people, living people, who make their personal plans with estate taxes in mind. Someone may retire early because of that tax. Then the additional people he would have hired also suffer from this tax.

Another man argued that the estate tax is not a significant problem because people can buy life insurance to pay that tax. He seems to think that the Tooth Fairy will pay the large premiums on those policies.