Ace:
In what possible way does that cite conflict with anything that I’ve said?
Not true. Your cite has it slightly wrong. All estates are subject to the Federal Estate Tax. However there is something called the Unified Credit, which every person has and may use during their life or at the time of death. It has gone up this year, and is either 700k or 750k, I forget.
So, for example, if a person had engaged in gifting and used up their Unified Credit exemption and died with a total estate of 50k that 50k would be subject to Federal Estate tax.
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This is called the unlimited spousal exemption, and is true.
Again, I don’t see how this disagrees with anything I’ve said. The figure applies only to Federal Estate Tax though, I’m sure.
I’m going to take a chance and explain something to you. The primary tool in estate planning of estates under 1.5mm is something called the unified credit bypass trust provision which is placed in a will.
I’m not going to explain how it works, but the effect is that with proper estate planning, a married couple can shelter a 1.5mm estate so that on the second death there are no Federal taxes due.
Similarly there are other tools for larger estates such as life insurance trusts, charitable remainder trusts, gifting strategies etc etc that if implemented properly can completely wipe out the estate tax owable on very large estates.
There are still other strategies that while they don’t eliminate the tax, they create an asset that exists to pay the tax, effectively neutralizing it.
In this manner there is little reason why a sophisticated person with an estate of almost any size, and reasonable foresight or planning, need pay any estate tax whatsoever.
The estate tax then actually does not tax wealth. What it ends up taxing are people of moderate wealth who do not spend thousands of dollars hiring the services of an estate planner.
The whole estate tax as it exists now is basically set up to catch the unwary, or the distrustful. The people who usually get caught are the elderly, who tend to be private and suspicious. They may posess moderate wealth. Because they are unsophisticate they don’t know that they need estate planning, and their not comfortable bringing an attorney into their business.
I’ll give you an example:
A retired couple owns their own home $100k, has two IRAs $250k each, and let’s say $900,000 in CDs for a total estate of $1.4mm.
This couple recieves a moderate pension, but they are children of the great depression, and they live frugally and save which is why they have so much in Cds. They take only the minimum from their IRAs, trying to save them as long as possible since they are growing tax-free.
Now let’s kill them. One dies, and then the other dies 6 months later. They are each others beneficiaries, and then their children are the contingent beneficiaries.
Let’s dispense with final expenses, assume they had insurance and prepaid funerals and move on.
Let’s do the IRAs first. The children should have two choices here. They can take over the IRAs and remove the cash based on their added life expectancies, or they can pull the cash out now. Not too many know about the former, and the latter is simpler so let’s take that route.
First, there’s the income tax on the money coming out of the IRA.
That’s going to be about 190k.
Let’s have the estate sell the house and wrap it up. I think the Unified credit is 750k so we’ll use that and leave them with a 650k taxable estate which gets taxed at 55%. That’s $375,000.
That gives the total estate shrinkage $575,000.
upon death 40% of their estate has gone to tax.
There is no reason why with a little planning and a few simple changes to their will that they could have completely avoided all the tax.
The effect of the estate tax is that people get taxed simply for not hiring estate planners, not for their wealth.
They got screwed because they were ignorant of the complex loopholes, but primarily because they were old and wanted to maintain their privacy.
The tax primarily takes advantage of the fact that a lot of old people don’t like telling other people about their money.
That’s where the bulk of your 2% comes from. Much larger estates and much wealthier people tend to be more comfortable hiring and listening to advisors, and they take advantage of the loopholes to pass their estates on largely unchanged and sometimes even larger because of their death.
In many cases the superwealthy do pay estate taxes, but it really doesn’t effect the wealth they pass on as what they do amounts to the government subsidization of the life insurance industry.
The people who get penalized are not the superwealthy, but the moderately wealthy. The private savers, not the large earners.
