Estate taxes

[Nords]

Samclem's comments struck a thought with me, so I'll split this off from the much-abused teacher-pay thread.

I'm fundamentally conflicted on estate tax. Generally I don't like taxes but I have a real warm & fuzzy feeling for this one.

First, I'm not sure that our kid needs to be burdened with our assets, let alone our estate tax. I much prefer the "compound it until you don't need it anymore, then start your charitable giving after you die" approach. Hopefully by the time she could inherit from our combined estate she'd be in her 80s anyway. So estate tax is not personally affecting our situation, especially (as FD points out) as long as the bypass trusts can shield the assets.

Second, much of Buffett's business-buying success has been due to estate tax. Look at a family-owned company like Justin Boots or Clayton Homes. Their owners are having a wonderful time building a business, and to them the gazillions of dollars of profit is an incidental side effect of their prowess. But if they die in the midst of their avocation then the estate tax is going to be a heavy burden on their heirs-- one that might even force them to sell off control in order to raise the cash.

Enter Buffett, a guy who pours millions of dollars into the former owner's pockets while letting them keep doing their thing. It's the perfect solution for any business owner (let alone Buffett) and they wouldn't be interested in selling out if it wasn't for the specter of paying such a heavy tax for dying on the job.

Same thing for Tweedy, Browne selling off their investment firm to a holding company. They're still running the show for their new managers, and doing what they'll probably want to continue doing until they die at their desks, but now their estate-tax problems are solved.

So if estate taxes make business owners seek guys like Buffett then I'm all for the tax. I've probably made more money off the estate tax than I'll ever pay!

 

[Martha]

Money for government has to come from somewhere. I would rather have it paid from my estate when I am dead than from me when I am alive.

An estate tax helps redress the unequal distribution of weath. The gap between rich and poor continues to increase. Let's not make it worse.

The estate tax likely encourages charitable giving.

Oh, and don't forget, the heir get the tax advantage of a stepped up basis, even if your estate falls within exemption limits.

 

[saluki9]

I don't see how it's the duty of government to redistribute wealth?

The estate tax angers me more than any other tax. To me it's the most bold and upsetting tax that a goverment can inflict on people. Basically they are saying "It's not bad enough that we screw you for your entire working life, now when you're dead we are going to rob your grave"

I suppose you have to be a true liberal though to think that the govt knows what is better for your children than the parents

 

[HelpMeRhonda]

Our situation,

I've come from nothing, self made the whole way. I've been blessed / given the opportunity to earn more than entire generations of my family before. We've paided as much as 59% in taxes some years. Poor tax planning on our part (probably). But we lived the dream of starting a company, working the 20 hr days for years to make it successful, and sold it. And we paid (big time in taxes) for the opportunity to live the dream.

I continue to work hard to A) Build family wealth to pass on, B) donate to significantly to charity.

To know that a significnat amount of our already taxed estate will be wiped out because of the year we die is beyond the duty of any one American tax payer.

This is probably a little hard to follow, the emotion and tears are making it difficult to type.

 

[shiny]

I continue to work hard to A) Build family wealth to pass on, B) donate to significantly to charity.

To know that a significnat amount of our already taxed estate will be wiped out because of the year we die is beyond the duty of any one American tax payer.

This is probably a little hard to follow, the emotion and tears are making it difficult to type.

First of all, let me just say that I AM one of those liberals who doesn't believe that the estate tax should be abolished (wanted to get that out of the way before someone feels the need to step in and call me a liberal )

But, I do hate for you to be crying over your money...

Have you researched the details?? You and your spouse can pass an unlimited amount of property to each other. You can leave up to 2 MILLION dollars to your family without estate tax - this doesn't include the unlimited amount that you can leave to charities without tax. Also, there are many ways you can start getting money out of your estate - like gifting 11k per year to anyone that you'd like (22k if both spouses make the gift) and that doesn't come out of your alloted 2M.

 

[HelpMeRhonda]

First of all, let me just say that I AM one of those liberals who doesn't believe that the estate tax should be abolished (wanted to get that out of the way before someone feels the need to step in and call me a liberal )

But, I do hate for you to be crying over your money...

Have you researched the details?? You and your spouse can pass an unlimited amount of property to each other. You can leave up to 2 MILLION dollars to your family without estate tax - this doesn't include the unlimited amount that you can leave to charities without tax. Also, there are many ways you can start getting money out of your estate - like gifting 11k per year to anyone that you'd like (22k if both spouses make the gift) and that doesn't come out of your alloted 2M.

Believe it or not, I, also consider myself a liberal in my beliefs.
Yes, we have good advisors (including an FA ) working with us to minimize the tax situation.

I guess, I wish rather than have a large amount taken by the govm't, there would be some % required to be gifted to charities of choice. I'd like some say in where it goes. And I believe I could do a better job leveraging the $$$ by the charities we chose.

I've shared more about our personal situation then I'm comfortable doing. . Just one of those who would like to see a completely different estate tax approach.

 

[Anansi]

First of all, let me just say that I AM one of those liberals who doesn't believe that the estate tax should be abolished (wanted to get that out of the way before someone feels the need to step in and call me a liberal )

I am practically a reactionary and the estate tax is the one tax I do agree with (User error: I seem to have lost the 'endquote' here)

MODERATOR EDIT fixed the end quote.

 

[shiny]

I guess, I wish rather than have a large amount taken by the govm't, there would be some % required to be gifted to charities of choice. I'd like some say in where it goes. And I believe I could do a better job leveraging the $$$ by the charities we chose.

I understand, I don't go around posting my financial specifics either, but this one is within your control - once you have it set up that both you and your spouse leave 2 million to family, etc. (for a total of 4 million) then the rest can go to the charity that you choose! I think that the estate tax laws result in even more given to charity than would be otherwise. Talk to your FA about how important charity is to you (if you haven't already) and you may be surprised at all the options that are available to you pre and post death!

 

[retire@40]

I don't see how it's the duty of government to redistribute wealth?

The estate tax angers me more than any other tax. To me it's the most bold and upsetting tax that a goverment can inflict on people. Basically they are saying "It's not bad enough that we screw you for your entire working life, now when you're dead we are going to rob your grave"

I suppose you have to be a true liberal though to think that the govt knows what is better for your children than the parents

It's a necessary evil.

I'm a proud conservative and I still think it's important not to let wealth accumulate to an exaggeration, which is what you would have without an estate tax. This country thrives because of a strong middle class.

That said, I think the estate tax could (and probably will) be made more fair by having it apply only to estates valued at $5 million or more while still preserving the stepped-up basis on all estates.

 

[magellan_nh]

I don't see how it's the duty of government to redistribute wealth? Basically they are saying "It's not bad enough that we screw you for your entire working life, now when you're dead we are going to rob your grave"

ok, not to start a flame war or anything, but I have a different opinion of the estate tax. I prefer to think of it as a tax on the transfer of wealth, rather than a re-taxation of wealth. The whole double taxation argument is a bit silly anyway. With an income tax, money doesn't get taxed, only the transfer of money gets taxed!

Now I understand that the way the laws are written are more complicated than that, but I think of it the same way as if the inheritee won the lottery. Lottery winnings, like nearly every other transfer of wealth, get taxed as income. There aren't many ways for a person without wealth to get wealth without having to pay a tax on it.

Why should we carve out an exception on the wealth transfer tax (income tax) when the money comes from a dead person? If we're going to carve out special exemptions, maybe there should be one for entrepreneurs who create wealth through innovation, or for scientists who create wealth by discovering life saving medical treatments.

On second thought, I prefer a poliitally conservative approach that minimizes the use of the tax code to achieve social goals. I vote for taxing all wealth transfer, including inheritances.

Just my $.02

Jim

 

[MasterBlaster]

Isn't it bad enough just to die !

(if you drive a car, car - I’ll tax the street;
(if you try to sit, sit - I’ll tax your seat;
(if you get too cold, cold - I’ll tax the heat;
(if you take a walk, walk - I'll tax your feet.

Taxman!

'Cause I’m the taxman,
Yeah, I’m the taxman.

 

[califdreamer]

I'm not writing this to be a smart@$$. I'm really, really open to serious ideas. But, I must say, I don't want to hear any more about tax cuts until someone can show me the specific guv spending cuts that will need to be made to offset the loss of revenue.

And please don't tell me all the revenue will be made up by the tax cut. Yes, some portion of the tax cut may pay for itself through increased econ activity but it is not a wash. It's really, really not.

"Fraud and waste" won't cut it either. Realistically, we'd have to go after entitlements. But which specific entitlements?

 

[FIRE'd@51]

Well, if the Democrats do what they told us they'd do and get us out of Iraq, that will free up over $100 billion per year.

 

[macdaddy]

There are so many ways around this for rich people... I have friends in their 30s who already own almost all of their family's assets, in order to avoid estate tax when their parents die... I saw one financial statement that was filled up with Trust A, Trust B, Trust C, etc. The ones who really benefit from this seem to be the lawyers who put it all together at $300/hour. I would feel bad for someone whose parents didn't feel comfortable enough to do any estate planning and consequently lost 50% of a hard-earned estate to the tax man. But not too bad.

 

[samclem]

Well, I've probably already used up my sopabox time over at the much-abused Teacher's Pay thread. But, here are my points in brief:
-- First, the estate tax is not the most irksome govt intrusion in our lives. I understand the stated rationale for it.
-- Nitnoid: Our income tax system is supposed to tax income. So, if we are going to count this money going to Junior as "income" to him, why isn't he the one responsible fr paying it?
-- More basic: The government social engineering game. My money is my property. I earned it, and I played by the rules by paying tax on it when I earned it. If I spend it on a new car, I pay no federal tax. If I give it to charity, I pay no federal tax. If I give it to my children (above some arbitrary amount) then, for some bizarre reason, the tax laws dictate that I forfeit some to the government.
- The flip-side of the point Nords made regarding business transfers: Some familes want to contine the business as a family business, but the tax code makes this impractical. That's not right, and using the tax code to create a buying opportunity for others sems like a fairly thin rationale. Yes, sometimes it does works out better for everyone. Other times, I'll bet it doesn't.
- Okay, so there are creative ways around having to pay the estate tax. But, if we believe that people should pay taxes, then shouldn't the rules be simple enough that avoidance is not practical?

I'm starting to like Patrick's idea more and more--just bury the money in the back yard before you croak (no tax to you) and tell your kids where it is (no tax to them--until caught.)

Of course, all this is avoided with a National Retail Sales Tax . . . (ducking)

 

[Alex]

Candidly? I think the estate tax sucks. The freakin Government needs to control spending and then revenue wouldn't be a problem. Seriously, family owned business and family farmers are the ones that suffer from the estate tax. The truly rich shelter their money and pay very little in taxes anyway.

BTW IMHO, Warren Buffet is a flaming hypocrite on this issue. He favors the estate tax, meanwhile he gives most of his money to a foundation, specifically to avoid estate taxation.

 

[Khan]

Seriously, family owned business and family farmers are the ones that suffer from the estate tax.

Can you cite some cases?

 

[ERD50]

But, if we believe that people should pay taxes, then shouldn't the rules be simple enough that avoidance is not practical?

That is a great statement, IMO. Too bad our legislators are so focused on making taxes complex.

One of the issues with the estate tax, it quickly climbs to 50% rates. This provides a lot of incentive to find loopholes, which defeats the purpose of the tax in the first place. Make it 15%, and maybe some people wouldn't work so hard to try to avoid it.

And what if someone has a child with special needs? $2M may not really go all that far in providing care, plus, maybe they would like to leave some to any other children. Set up a trust? Maybe, but that is one of those loopholes that other people use to avoid the tax.

KISS principle is needed - ERD50

 

[Alex]

Can you cite some cases?

http://www.policyandtaxationgroup.com/html/stories.html#stories

 

[Zathras]

Alex,

What you linked to is an op-ed article. Lots of supposition, few facts.
I did find some information on the site about a poll taken. However, the poll is 6 years old and is not a poll of people that actually suffered under the estate tax.

Here is the question they asked:
"If you knew that your children would pay a 55% tax on the full value of your
business or property at your death would you sell your business or property early
to provide liquidity to pay the tax, OR would you pass the business or property to
your children and heirs upon your death, and have then sell it and pay the tax?"

This is misleading, because the estate tax doesn't work the way the question implies it does.
My understanding is that the first 2 million dollars is exempt from the tax.

I like the comparision of a child winning a lottery and getting an inheritance. Why would we tax one source of income (lottery), yet not the other (inheritance)?

 

[Texas Proud]

First, to the person who asked about cutting spending.... I can cut a LOT of spending... first, repeal the drug welfare program that cost trillions... second, don't give a full cost of living to SS and other payments... let them stay the same for a few years... cut 'welfare' even more, cut education from the federal govnt (which they should not be in anyhow)... and I can go on..

As for keeping wealth in families... well, this just does not happen. I had read an article many years ago that said the kids or the grandkids of wealthy parents spent the money... only the very very rich keep it..

And the tax does not bring in that much money to the gvmt.... and the cost of enforcement is also one of the highest for each $ of tax...

I think that there should be no estate tax... OK, get rid of the step up in basis... fine, that is fair. Also, tax all deferred income... again, fair.. but why should I pay up to 50% of my estate as a tax Just is not fair..

 

[Martha]

As far as the effect on family businesses and farms, what I have read in the past is that there is little adverse effect. Unfortunately, I can't find a link to data. There are very very few people who own family farms and businesses that result in an estate tax owned. When a tax is owed, there is a mechanism to pay it over time to the IRS. If someone really wants, I can find a link to information regarding the right to pay the tax over time if the tax is owed as a result of the deceased person's ownership of a small business or farm.

Data from Minnsota indicates that in the last few years most of the estate taxes it collected came from ONE estate. That estate paid $112 million in taxes. The prior year the total estate tax collected in Minnesota was 72 million. The wealthy in fact can pay a big tax.

 

[brewer12345]

First, to the person who asked about cutting spending.... I can cut a LOT of spending... first, repeal the drug welfare program that cost trillions... second, don't give a full cost of living to SS and other payments... let them stay the same for a few years... cut 'welfare' even more, cut education from the federal govnt (which they should not be in anyhow)... and I can go on..

As for keeping wealth in families... well, this just does not happen. I had read an article many years ago that said the kids or the grandkids of wealthy parents spent the money... only the very very rich keep it..

And the tax does not bring in that much money to the gvmt.... and the cost of enforcement is also one of the highest for each $ of tax...

I think that there should be no estate tax... OK, get rid of the step up in basis... fine, that is fair. Also, tax all deferred income... again, fair.. but why should I pay up to 50% of my estate as a tax Just is not fair..

Military spending: whackety-whack!

 

[donheff]

I join with the estate tax lovers. The Government needs money and we can't take it out of the pockets of the low or middle income. GB's current cut in the estate tax has spiraled the deficit pretty high. Thats fine if we cut spending by say, stopping the entire war on drugs, down scaling our military, and reducing SS for us. But most of those things are not going to happen. So the alternatives are to tax those of us who are high earners more while we are earning or more when we are dead. I vote for when I am dead. Lower taxes while I am earning allow me to save more building up a portfolio sufficient to assure a bountiful retirement. If all goes well and that portfolio increases in value over retirement, I get taxed at death for what I skipped in life -- and my kids get a nice chuck of change. If I was taxed when I was earning, I would have had a much smaller portfolio -- my retirement would be constrained and the kids would be less likely to get anything.

 

[HelpMeRhonda]

Alex,

I like the comparision of a child winning a lottery and getting an inheritance. Why would we tax one source of income (lottery), yet not the other (inheritance)?

Actually quite a difference. Cost $2 bucks and takes a couple minutes to play the lottery. On the other hand our estate took a life time of:
investing every nickel I hand,
risk taking,
small business ownership,
LYBM - big time,
employee others who paid taxes,
More hours worked then humanly healthy
paying full bill for kids education, etc.