Why inheritance is the dirty secret of the middle classes

[ncbill]

PS: I'm going to dig deeper into the records, but my DW never had a high paying job, was a stay-at-home Mom for many years, and I just noted that her own Roth IRA is now over 1/2 a Million dollars (and very conservatively invested, I counted it as part of our fixed income AA). Yes, I had a good career so she could be a SAHM, and then take a modest paying job she enjoyed. But a half-million is doable for many, if they choose to make a max contribution to their IRA, rather than spend it.

-ERD50

Yep, my kids divert 30% of their pay to their Roth TSP & max out an external Roth as well.

On gross income as low as $3,500/month.

 

[aaronc879]

Yep, my kids divert 30% of their pay to their Roth TSP & max out an external Roth as well.

On gross income as low as $3,500/month.

How are they ever going to retire before Medicare kicks in if they can't generate enough income to qualify for ACA subsidies. Maybe it would be better to split the TSP between regular and ROTH rather than all ROTH or do all ROTH in TSP but all traditional for IRA?

 

[aaronc879]

Medicaid is an option. Maybe not the best one, but it is available.

Not sure it is an option. Isn't there an asset limit, not just an income limit?

 

[Gumby]

Not sure it is an option. Isn't there an asset limit, not just an income limit?

It occurred to me, as you were posting, that it probably varies by state, which is why I deleted my post. In Connecticut, there currently is no asset limit for Husky D (Medicaid for non-disabled adults w/o dependents), only an income limit (138% FPL).

 

[Fermion]

Not sure it is an option. Isn't there an asset limit, not just an income limit?

Seems to be just an income limit until you get to age 65.

 

[ncbill]

How are they ever going to retire before Medicare kicks in if they can't generate enough income to qualify for ACA subsidies. Maybe it would be better to split the TSP between regular and ROTH rather than all ROTH or do all ROTH in TSP but all traditional for IRA?

They get a 5% match in traditional.

Since they're military they'll probably just switch to Tricare Prime or Tricare Select if they retire before age 65.

Either of those will likely be cheaper than any ACA plan, even with subsidies.

 

[all4j]

The speculation is your statement that inheritance taxes are a "significant part of why" the wealth disparity in France is lower. You don't know that and it would be a very hard thing to determine.

Agreed. Actually there is some research counter to this claim. There was a paper done by a Paris based organization a couple of years back "Why is Europe more equal than the United States?". Went back to 1980 -- so a wide range. I don't claim to have read it all (in fact, one might file it in the "there's a paper to prove anything you want proven" file?); I had seen it referenced elsewhere.

tl;dr -- cut/paste a couple of sentences in intro:

"the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers....
after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country.....
Europe has been much more successful than the US at ensuring that its low-income groups benefit from relatively good-paying jobs"

Yes, I pulled out 3 from a 60-something page pdf which is readily available on the web.

Not sure this is really about facts though, nor pertinent to the thread. But for clarity...some states have estate taxes, some don't. Likewise, there are some states that have inheritance taxes, most don't. The estate tax is paid by the estate whereas the inheritor pays the inheritance tax. 2 separate things. The IRS says the estate tax "is a tax on your right to transfer property at your death".

 

[marko]

"the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers....
after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country.....
Europe has been much more successful than the US at ensuring that its low-income groups benefit from relatively good-paying jobs"

Interesting insight. As Americans living in France for many years, we were often stuck by people in relatively low paying jobs (taxi drivers, waiters, trash collectors, grocery clerks) taking two week holidays skiing the Alps, four week jaunts across the US, Asia or Africa and so on.

Of course they were not burdened with high health care and higher education costs but I still find your stat interesting.

 

[pb4uski]

You said you see my point, but you re+made yours in response I see.

I find it wrong we have a death tax, a second tax system completely separate from income taxes. This is nothing more than a money grab. The modestly high threshold and basis step up seem well deserved under the circumstances.

"death tax" is a deliberate misnomer for the inheritance tax, coined by a political party with the intent of confusing millions of voters whose estates will never be taxed. Nobody is taxed when they die. I urge you to refrain from posting loaded and misleading political talking points like "death tax".

As for "modestly high threshold", I would not describe a $12.06 million (double that for a couple) federal threshold as "modestly high". It's extremely high, and it will increase to $12.92 million in 2023. Due to loopholes, I believe we need an Alternative Minimum Inheritance Tax.
...

I'm with anethum on this. "Death tax" is just a disingenuous, politically charged term for the estate tax... even inheritance tax is a misnomer because there is no federal tax on inheritances but there are a few states that have inheritance tax... it is an estate tax... period.

A common complaint about the estate tax is that "the money has already been taxed before" and there is an valid point to that so let's change the estate tax to a 15%/20% capital gains tax for the excess of the fair value of the estate's net assets over the tax basis of the estate's net assets... a tax on the gain as if all assets had been sold on the date of death. And the estate paying that tax gets the beneficiaries a stepped up basis on the assets. The estate would still get advantage of lower capital gains tax rates and you could still include a significant exclusion amount to reduce the compliance burden for smaller estates.

You could also include tax-deferred accounts so beneficiaries would receive that money tax-free to do what they chose and it would simplify compliance... get rid of a lot of complex rules.

 

[Andre1969]

It was an interesting article. It is an odd idea to me to say that inheritances are "unfair" to people not receiving them. This is the entitlement mentality that seems prevalent among some these days.

Eh, everything's unfair, to someone. If a person stubs their toe, they might argue that it's unfair their double-amputee friend did not!

I had my paternal Granddad die in September 2016, and then my Dad about 6 months later. A lot of my cousins on that side of the family thought it was "unfair" that I got a pretty big inheritance. Dad had two brothers. One had two kids and the other had three, so there was 6 of us grandkids, total.

So basically, Dad got 1/3 of Granddad's estate, but then when he died, that 1/3 passed on to me, as well as Dad's own estate. Some relatives thought it was "unfair" that I ended up with 1/3 of Granddad's estate, when the other grandkids ended up with nothing.

Nevermind the fact that my cousins still had something I don't...a living father.

 

[PatrickA5]

I'm with anethum on this. "Death tax" is just a disingenuous, politically charged term for the estate tax... even inheritance tax is a misnomer because there is no federal tax on inheritances but there are a few states that have inheritance tax... it is an estate tax... period.

A common complaint about the estate tax is that "the money has already been taxed before" and there is an valid point to that so let's change the estate tax to a 15%/20% capital gains tax for the excess of the fair value of the estate's net assets over the tax basis of the estate's net assets... a tax on the gain as if all assets had been sold on the date of death. And the estate paying that tax gets the beneficiaries a stepped up basis on the assets. The estate would still get advantage of lower capital gains tax rates and you could still include a significant exclusion amount to reduce the compliance burden for smaller estates.

You could also include tax-deferred accounts so beneficiaries would receive that money tax-free to do what they chose and it would simplify compliance... get rid of a lot of complex rules.

I like your plan. Make it have a decent exclusion amount so the everyday middle class gets to keep the house or a decent amount of stock gains, but prevents the uber wealthy from basically paying nothing on their gains from generation to generation.

 

[CRLLS]

I like your plan. Make it have a decent exclusion amount so the everyday middle class gets to keep the house or a decent amount of stock gains, but prevents the uber wealthy from basically paying nothing on their gains from generation to generation.

One part I am not comfortable with is family owned and run businesses being taxed upon death of the "then current" owner. Family farms are one such entity. Having to sell off the asset in order to pay the estate tax should be addressed somehow. I'm not sure how though.

 

[pb4uski]

^^^ You wouldn't necessarily have to sell the family business or the family farm.

First, it might prompt more family businesses and family farms to have life insurance on the key owners that would provide a tax-free death benefit to pay any tax due. Smart businesses already do this today. LI premiums where the benefit is to be used to pay estate taxes is effectively pre-paying the tax... if it is designed correctly the death benefit covrs the tax.

Alternatively, the business could take out loans to pay the tax, in effect spreading out the tax cost over the term of the loan.

 

[OldShooter]

One part I am not comfortable with is family owned and run businesses being taxed upon death of the "then current" owner. Family farms are one such entity. Having to sell off the asset in order to pay the estate tax should be addressed somehow. I'm not sure how though.

Yes. Any by illiquid asset is a problem if there is a forced sale to pay estate taxes. Not only is the asset lost, but the price obtained is likely to be low due to the urgency of the sale.

I would be interested to see the stats on who actually pays estate taxes. The "über rich" make a nice rhetorical hobgoblin but my guess is that the farm and business owner class pays the majority of the taxes.

 

[pb4uski]

Yes. Any by illiquid asset is a problem if there is a forced sale to pay estate taxes. Not only is the asset lost, but the price obtained is likely to be low due to the urgency of the sale.

I would be interested to see the stats on who actually pays estate taxes. The "über rich" make a nice rhetorical hobgoblin but my guess is that the farm and business owner class pays the majority of the taxes.

It doesn't sound like your hypothesis is correct.

See below (2017) and https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

... Only roughly 80 small business and small farm estates nationwide will face any estate tax in 2017, according to TPC. TPC’s analysis defined a small-business or small farm estate as one with more than half its value in a farm or business and with the farm or business assets valued at less than $5 million. Furthermore, TPC estimates those roughly 80 estates will owe less than 6 percent of their value in tax, on average. ...

 

[OldShooter]

... First, it might prompt more family businesses and family farms to have life insurance on the key owners that would provide a tax-free death benefit to pay any tax due. Smart businesses already do this today. LI premiums where the benefit is to be used to pay estate taxes is effectively pre-paying the tax... if it is designed correctly the death benefit covrs the tax.

Alternatively, the business could take out loans to pay the tax, in effect spreading out the tax cost over the term of the loan.

That's all very nice if the business or farm is profitable enough to carry those burdens. And both insurance and loans have cost burdens that the estate must pay on top of the government confiscation.

No ... if I work my a$$ off to build a successful business or farm (paying taxes all the way) it is not OK for the government to come in and confiscate a major fraction. Being dead is bad enough. Being dead and then being robbed is even worse.

 

[OldShooter]

... See below (2017) and https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

I skimmed the article. Its objective is to argue for the estate tax. Hardly unbiased. Wikipedia: "The Center on Budget and Policy Priorities (CBPP) is a progressive American think tank ..."

I see nothing on the moral point. The arguments are more like: "It doesn't affect very many people." "We need the money ('an important source of federal revenue')." "We don't have to spend very much money collecting these taxes." "Other countries are worse." "We think [unsupported] that the rich guys are dodging a lot of these taxes via 'loopholes' and we don't like it."

They do, rightly IMO, criticize the basis step-up. But there isn't enough information to test my hypothesis. No information on who pays.

 

[CRLLS]

^^^ You wouldn't necessarily have to sell the family business or the family farm.

First, it might prompt more family businesses and family farms to have life insurance on the key owners that would provide a tax-free death benefit to pay any tax due. Smart businesses already do this today. LI premiums where the benefit is to be used to pay estate taxes is effectively pre-paying the tax... if it is designed correctly the death benefit covrs the tax.

Alternatively, the business could take out loans to pay the tax, in effect spreading out the tax cost over the term of the loan.

So how would that work? Assume the family business is operated simply as a sole proprietorship. It is reported on the owner's personal income tax. Can he take out life insurance on himself making his "estate" the beneficiary to pay the taxes, which literally does not exist until his passing. As for a loan, the business becomes part of the estate. Can beneficiaries legally pay the estate tax? If so this is the same as having to sell the asset IMO. A beneficiary having to take a loan out debt for receiving an asset is the same as having an "Inheritance tax" IMO. And what if the "farm" was not a working farm but just held family land with no income to pay any future loans?

None of that is acceptable to my way of thinking.

 

[pb4uski]

That's all very nice if the business or farm is profitable enough to carry those burdens. And both insurance and loans have cost burdens that the estate must pay on top of the government confiscation.

No ... if I work my a$$ off to build a successful business or farm (paying taxes all the way) it is not OK for the government to come in and confiscate a major fraction. Being dead is bad enough. Being dead and then being robbed is even worse.

If the business isn't profitable enought to pay for life insurance on the owner to pay for the estate tax then it probably isn't valuable enough to exceed the estate tax exemption so your first point is rubbish.

While the business that you worked your a$$ off to build may have paid income taxes on income all the way, it never paid income tax on unrealized appreciation... you're now dead and that tax bill is due... your heirs don't get to get it tax free (and that is why you should by life insurance if you want your heirs to get it unencumbered).

From post #45 in this thread:

.... if a family has to sell the family business to pay estate tax then it is because they either planned poorly or were too cheap to buy life insurance to cover the tax, so it is hard for me to be sympathetic. Sorry.

Stepped-up basis without paying estate tax is a free lunch that needs to end.

 

[pb4uski]

I skimmed the article. Its objective is to argue for the estate tax. Hardly unbiased. Wikipedia: "The Center on Budget and Policy Priorities (CBPP) is a progressive American think tank ..."

I see nothing on the moral point. The arguments are more like: "It doesn't affect very many people." "We need the money ('an important source of federal revenue')." "We don't have to spend very much money collecting these taxes." "Other countries are worse." "We think [unsupported] that the rich guys are dodging a lot of these taxes via 'loopholes' and we don't like it."

They do, rightly IMO, criticize the basis step-up. But there isn't enough information to test my hypothesis. No information on who pays.

I only skimmed the article but the point of the link was only to show the source of information to try to answer your question.

You said:

... I would be interested to see the stats on who actually pays estate taxes. The "über rich" make a nice rhetorical hobgoblin but my guess is that the farm and business owner class pays the majority of the taxes.

I simply provided a source of information that your hypothesis was rubbish. If because of your bias you don't like the answer, that's fine, but it doesn't change the answer. If you have better information, bring it on... but if you did I think you would not have asked the question.

Anyway, the information that I provided was based on a Tax Policy Center analysis.

The Urban-Brookings Tax Policy Center, typically shortened to the Tax Policy Center (TPC), is a nonpartisan think tank based in Washington D.C. A joint venture of the Urban Institute and the Brookings Institution, it aims to provide independent analyses of current and longer-term tax issues, and to communicate its analyses to the public and to policymakers. TPC combines national specialists in tax, expenditure, budget policy, and microsimulation modeling to concentrate on five overarching areas of tax policy: fair, simple and efficient taxation, social policy in the tax code, business tax reform, long-term implications of tax and budget choices, and state tax issues.

History
In 2002, tax specialists who had served in the Ronald Reagan, George H. W. Bush, and Bill Clinton administrations established the Tax Policy Center to provide analysis of tax issues.

 

[Gumby]

If this is going to turn into a personal argument, perhaps you guys could take it to PMs.

 

[pb4uski]

So how would that work? Assume the family business is operated simply as a sole proprietorship. It is reported on the owner's personal income tax. Can he take out life insurance on himself making his "estate" the beneficiary to pay the taxes, which literally does not exist until his passing. As for a loan, the business becomes part of the estate. Can beneficiaries legally pay the estate tax? If so this is the same as having to sell the asset IMO. A beneficiary having to take a loan out debt for receiving an asset is the same as having an "Inheritance tax" IMO. And what if the "farm" was not a working farm but just held family land with no income to pay any future loans?

None of that is acceptable to my way of thinking.

It's very common, especially before the estate tax exemptions were significantly increased, for closely held businesses regardless of form, to buy whole life aka permanent life insurance with a death benefit sufficient to pay the projected estate tax so they didn't have to sell the business. If they didn't plan ahead like that and have life insurance to fund the estate tax then they would have to sell the business or take out loans to pay the estate tax.

If someone owes income tax we don't say to them... oh, if you don't have the money to pay this tax without taking out a loan or selling assets you get a free pass.

If the asset is not a working farm but just farmland with no income then it isn't a business and is no different than any other highly appreciated asset. It would be stupid to collect estate taxes on estates of highly appreciated stock but not for highly appreciated farmland. Both are just highly appreciated assets. The later may have more emotional ties to the family, but it isn't really relevant to tax policy.

 

[ivinsfan]

^^^ You wouldn't necessarily have to sell the family business or the family farm.

First, it might prompt more family businesses and family farms to have life insurance on the key owners that would provide a tax-free death benefit to pay any tax due. Smart businesses already do this today. LI premiums where the benefit is to be used to pay estate taxes is effectively pre-paying the tax... if it is designed correctly the death benefit covrs the tax.

Alternatively, the business could take out loans to pay the tax, in effect spreading out the tax cost over the term of the loan.

...that's such a moving target in today's climate. Farmland in particular is a huge issue...LI gets more expensive as you age unless you got sucked into a whole life policy. Can you imagine term insurance for a 75 YO if they could even qualify for term. Yes can get some payout to mitigate cash outlay for estate tax but you can't really cover it all. It's an issue...the only saving grace would be a stepped up basis if you do have to sell land.



We haven't even opened our estimated notice of tax for next year. A farm got sold that is probably 2 miles from our house and two neighbors got into an insane bidding war. That's going to end up costing us money.!!! And if someone local died tomorrow that would factor into any possible estate tax...

 

[mpeirce]

There’s another factor in paying taxes on appreciated assets and that’s inflation. This also applies to regular gains as well.

Paying taxes on gains that are the result of inflation don’t really pass a “fairness test” either.

 

[Fermion]

There’s another factor in paying taxes on appreciated assets and that’s inflation. This also applies to regular gains as well.

Paying taxes on gains that are the result of inflation don’t really pass a “fairness test” either.

But that is what happens with nearly all assets. Bonds are some of the worst for this...you barely keep up with inflation then are taxed on it. Why should inherited assets get a free pass?