Gift and Estate Tax, a good thing?

Great Debates
1

According to the newspaper, the Senate has given the coup de grace to President Bush’s proposal to eliminate the US Gift and Inheritance Tax. Given that under the present scheme:

The first $1,000,000 of net estate after deduction of the decedent’s debts, and expenses of probate including attorneys’ fees, is exempt from tax;

Every thing that passes to the decedents spouse is exempt from tax;

Between the unified exemption and the marital deduction $2,000,000 can be passed to a third person with out tax.

By the use of some simple devices the exemption can be increased even more.

The recipient of property from a decedent takes the property at a tax basis equal to the value it had at the decedent’s death—e.g., if I buy a farm for $500,000 and when I die it is worth $1,000,000, my kids get the farm at a $1,000,000 basis. There is no tax on my estate because of the $1,000,000 unified exemption. If my kids sell the farm for $1,000,000 then their income from the transaction is Zero, not $500,000, because their tax is based on the difference between the sales price ($1,000,000)and their stepped up basis ($1,000,000), not my $500,000 cost basis;

Is that such a bad thing? Shouldn’t people with large estates pay for the ability to pass all that appreciation and untaxed wealth upon death? Would it be better to eliminate the tax and do away with the “Stepped Up Basis,” so that when the property is sold an income tax is paid on the difference between the decedent’s pre-death basis and the ultimate sales price?

2

Yes, they should. And, just to preempt the point here of “Why does the government have the right to take some of my money when I die?”, note how all arguments for repealing the estate tax take the point of view of the deceased…now dead and rotting…person.

From the point of view of the living, it is hard to justify intergenerational wealth transfer at all: What, I get money because I worked hard to be born into a wealthy family? What ever happened to “equal opportunity”? Of course, in reality one wants to work a compromise between this and providing people with incentives while they are alive (i.e., being able to provide for your heirs). Thus, the estate tax is a sort of compromise between these points-of-view.

Also, the government needs revenue and the estate tax is one of the most painless ways for revenue to be raised.

Some good facts about the estate tax, including the myths surrounding the “family farm”, “family business”, and the other excuses that the Republicans use to come up with nice poster children for estate tax repeal can be found at http://www.responsiblewealth.org/tax_fairness/Estate_Tax/Estate_Tax_Background.html

3

Indeed. Even the most virulently anti-tax conservative with brain cells to rub together has to have a way of comparing which taxes are more or less bad than which other taxes, so that he can say with some assurance, “when the revolution comes and we phase out all taxes, these taxes should go first, and those taxes can wait a few years before we kill 'em.”

By any measure that I can think of, no tax has as minimal a negative effect on productivity, incentive, fairness, and well-being of the body politic than the estate tax in its pre-Bush tax cut form.

If you cut that tax instead of another (say, the payroll tax that funds Social Security and Medicare), what argument are you going to make that that’s either a more practical or a more moral choice?

By taxing the estates of multimillionaires (and those estates only), you’re mildly reducing the extent to which you encourage people to be the offspring of multimillionaires. But since you don’t get to choose that, that’s moot. And it’s hard to argue that the hardship the tax would inflict on those offspring is greater than the hardship that the payroll tax inflicts on working-class Americans.

And then there’s the farmers-and-small-businesses bullcrap. Estates involving substantial ownership of closely-held businesses and farms are allowed to pay off their tax obligations over a 15-year period. Farmers can further reduce their exposure by selling or donating conservation easements on their land to The Nature Conservancy or a similar group, so that the land is taxed at its value as farmland, not at its value as a potential development of exurban mini-mansions.

The challenge was raised in estate tax threads last year, when the Bush tax cut was being debated in Congress, to give a for-instance, real or hypothetical, where the pre-existing estate tax would have caused the dissolution of a farm or business. No one was able to produce one. (I’d provide a link, but the hamsters are slow today.) Consequently, I feel the onus is on proponents of repeal to demonstrate that (a) such a farm or business exists, and (b) this problem couldn’t be solved by measures specific to farms and businesses.

That permanent FET repeal is the domestic issue (other than homeland security) that this administration is willing to ‘go to war’ for, says something very unpleasant about it. That they’re for repeal is bad to begin with, but that the #1 group they’re willing to go to the mat for is the children of multimillionaires is pretty appalling. It’s not like they can’t look out after themselves.

4

I have two thoughts on this:

a) The estate tax is immoral. It’s simply designed to redistribute wealth, taking it from someone that the gummint thinks doesn’t deserve it, and handing it to others. Any tax whose purpose is to redistribute wealth is, in my view, fundamentally immoral.

b) Untaxed appreciation of assets should be taxed at death. If Bill Gates dies while holding $10 billion worth of stock that he acquired for $10 million, then the tax should be applied at death on the fair value. Had he sold the stock the week before his death, and bought another $10 billion asset, tax would have been taken in this case. I don’t see why the fact that he hadn’t yet sold it when he died should make a difference.

5

Let me take the opposing POV.

Consider a hypothetical 59-year old actuary from New Jersey. Let’s say he has two daughters and a grandson. He has ample savings, so he’s really working for the sake of his decendants.

Any money he earns will be taxed at around 50%, combining state, federal, OSDI, etc. When he dies, his savings will be taxed at 55%, i.e., only 45% will be inherited. So, for every additional dollar he earns, he can leave only $.23 to his descendants. “What’s wrong with that?” you ask.

Well, maybe 23 cents wouldn’t be enough to motivate him to work hard. Maybe he would waste his time non-productively by posting on a web site. Then, society would lose the benefit of his labors.

Worst of all, some unlucky Dopers would be forced to read his annoying posts. :smack:

6

December,

You are ignoring the fact that that 59 year old actuary from NJ’s (ahem) estate will only be taxed above the current unified credit amount. Thus, assuming you die after 2006, only the amount in your savings and remaining estate above $1mil will be taxed; probably significantly less than the %77 you claim.

Just how much does an actuary in NJ make these days?

7

If I understand you, you’re distinguishing between marginal rate and average rate. Yes, the average tax rate would be less than 77%, but the tax rate on each incremental dollar earned would be 77%.

Speaking of 2006, consider the fact that the inheritance tax reductions disappear in 2011, according to current law. This hypothetical person might be concerned about eating food prepared by his daughters in late 2010, because his death before year-end could mean a great deal of money to them.

A book called Jobs Rated Almanac has rated Actuary as the #1 or #2 profession during its various editions. It provides salary information.

8

December,

Sorry, I missed the word “additional” in your post. Also, the last sentence should have had a smiley. :smack:

9

december: *Well, maybe 23 cents wouldn’t be enough to motivate him to work hard. Maybe he would waste his time non-productively by posting on a web site. Then, society would lose the benefit of his labors. *

I don’t get it. If this hypothetical actuary is getting paid the same amount whether he works or posts to the SDMB, then a lower estate tax rate wouldn’t give him any more incentive to stop posting and start working. On the other hand, if society is paying only for the time he spends working, then his non-productive posting isn’t losing us any money.

*This hypothetical person might be concerned about eating food prepared by his daughters in late 2010, because his death before year-end could mean a great deal of money to them. *

Yuk yuk; if that were true, this hypothetical person would have much more important things to worry about than his tax status.

10

Kimstu, I believe that december is trying to point out that if the successful are punished in the form of wealth redistributing taxes, then they might not have any motivation to work hard.

This of course is based on the assumtion that the wealthy have their money as the result of hard work, to which you might disagree.

11

The fallacy, of course, is that our hypothetical New Jersey actuary’s estate and beneficiaries aren’t going to pay a nickel in Federal Gift and Estate Tax unless the dead actuary had a net worth of $1,000,000 or more after bequests to Mrs. Hypothetical Actuary. Mr. Hypothetical Actuary, in any event pays nothing, he’s dead. Assuming HA has a net worth at death of more than one million dollars, there are all sorts of schemes and devices to minimize and avoid the potential tax without evasion. (We don’t tell you what those are unless you pay for the information and paperwork.) There is, after all, a whole industry in this country based on avoiding and minimizing taxes. Someone once said that only the families of dummies pay estate taxes. That is close to true. With all the estate planning in the world, the cheapand dumb magnificently wealthy are the only people who get taxed. It seems to me that they should be taxed.
State inheritance and estate taxes are a different problem. In the States I am familiar with, however, there are loop holes in the tax system that will accommodate a Mack Truck and the tax rates are insignificant when compared to the federal rates.

I suppose that you can arrange to have your stash of wealth buried with you, but that will not avoid the tax and if there is a tax you will require an unusually large coffin. The game our Hypothetical Actuary is playing is a shell game with the marginal tax rates that ignores the exemptions and exclusions. This is the same game that was played with income taxes during the administration of the Great Communicator. The argument is phony in both situations.

12

Actually Spavined Gelding, the loopholes aren’t as easy as you think they are. In fact, one argument against death tax is that the rich rich have full-time accoutants and lawyers, so they get the benefit of the loopholes. Thus, e.g., Kennedys remain rich generation after generation.

However, the less-rich rich just pay the 55% rate.

Of course, those who aren’t paying at all probably don’t care. Following Russell Long’s observation, they’re happy to “tax that fellow behind the tree.”

13

December, I make my living working with the loop holes. I have spent my adult life learning them. For a price I’ll find you some. :wink:

14

Spavined Gelding, I’ve also looked for the loopholes, and haven’t been able to find any. The issue is less important than it once was for me, because a) the exclusion is going up, and b) our net wealth has gone down in the past couple of years.

But here’s our situation as of two years ago: Married, 39 years old, one small kid and another on the way, net worth enough to kick in significant estate taxes. We are saving money to have for our retirement. If we die, we want our money to go to our kids, not to Washington.

What are the loopholes that would keep estate taxes from being levied if we died? You say that they exist, but I’ve heard this before and I have never seen an example. And I don’t consider “give your money away $10000 at a shot” as a valid loophole, because if I give it away, it wouldn’t be available for its intended use, our retirement.

15

You shove it into a trust for your children. 10,000 a year per spouse can be moved into the trust. so there is no way to hide is all at once, but plenty of time to cover it if you live to a normal age. Add a little bit of premature-death insurance, and your heirs are completely covered.

16

Curt, as I understand it you are a 39 year old with a spouse and a child and a net worth of more than one million dollars. There are a number of obvious things to do. First you split your net worth between your spouse and your self so that each of you owns half the net worth without any survivorship ownership in the nature of tenancies by the entireties or joint tenancy. If your net worth was about $1,000,000, this reduces your situation to two separate $500,000 estates neither of which is subject to federal tax because both are less than the unified exemption. This simple step will cover you until your combined net estate exceed two million dollars.

If both of you together have a net worth of more than one million and less than two million dollars you might set up a trust in your will that takes care of the surviving spouse for life with a power to invade the corpus of the trust and with your kids as the remainder men to take on your spouses death. This, should be coupled with a bequest to the spouse big enough to reduce your taxable estate below one million dollars while not giving your spouse enough to get her estate over that amount. The property passing to the surviving spouse is excluded from the taxable estate and the property going into the trust for the spouse and kids will be subject to tax. The objective is to keep your testamentary gift to the trust below the amount of the exemption while keeping the surviving spouses estate below that amount, too.

Once you have over a two million dollar estate things stat to get a little complicated, involving charitable remainder trusts and similar schemes.

Remember, any dummy can get you no tax in the estate of the first to die by just giving everything to the surviving spouse, but at the danger of overloading the estate of the surviving spouse.

If you are serious about avoiding estate/inheritance taxes you need to go see your family lawyer with a complete financial statement. If your family lawyer thinks he is over his head he will recommend you to an expert in estate planning. What ever you do, don’t just sit around bemoaning the fact that you can’t see a loop hole and doing nothing. The government doesn’t tax people who take timely steps to protect themselves.

FREE ADVICE IS WORTH ABOUT WHAT YOU PAY FOR IT.

17

Why should Uncle Sam get money if someone gives me, say, a car?

It’s like the government gets mad if you get a gift.

18

Did any other pro-estate tax people beside me almost change their opinion on the subject upon considering this? :wink: Seriously though, here is a quote from Responsible Wealth, http://www.responsiblewealth.org/tax_fairness/Estate_Tax/Estate_Tax_Myths.html, on this subject:

But I don’t believe this claim is supported by the facts. Most of the revenues received from the estate tax are from estates worth well over where the tax kicks in. And here’s another quote from Responsible Wealth:

So, that means that estates in the top ~0.8% of taxable estates paid more than 20% of the estate taxes. Now, admittedly I don’t know much about the loopholes and it may be that there would have been many more $20+ million estates if not for loopholes that allowed people to decrease the reported value of their estates. But, still the point is that there is no evidence that the tax hits disproportionately on smaller taxable estates.

Also, another fact to consider is that the estate tax is sometimes avoided by donating to charities and charitable foundations. I personally do not think such avoidance is too bad a thing. And, in fact there is some concern about what the effect of the repeal of the estate tax will be on charitable giving.

Please don’t take it so personally. Noone said that the government is mad at you but simply that they consider this a taxable form of wealth transfer. The reason here is fairly obvious: If one finds virtue in the estate tax, then it makes sense to block the most obvious loophole by which people would avoid it, i.e., by transferring their wealth to their heirs as gifts.

19

Mr. Firefly:

::cough cough::

I think I showed some nice examples.

I had another nice one this year.

A pilot died in 2000 flying a private plane. No body was found so it took a while for the death certificate to come about, and the cause of death was listed as “presumed plane crash.” For a living this gentlemen was a pilot for UAL and over the years had accumulated close to a million dollars with of stock.

The stock dropped dramatically in value, they took advantage of a law that allows them to move the basis to a year after presumed death, and the stock continued to drop dramatically, by a factor of 90%. A fair portion of this was in an IRA.

The pilot’s major other asset was a 200 acre ranch in Colorado that he had inherited from his father, and had been in the family for generations.

That had to be liquidated to pay the taxes on the UAL stock, and the retirement plan distribution taxes.

So, here we have a man in his midfifties who had worked his entire life, lived frugally and acquired a multimillion dollar estate. Because of current estate laws the heirs were unable to liquidate the stock as it dropped yet were required to pay taxes on the inflated value.

When all is said and done the heirs have about 30K to split.

I have personally known several farms and businesses that had to be liquidated for estate purposes.

Most of these, it is true, are a result of poor estate planning. However one shouldn’t need to make onerous and costly arrangements to dispose of their assets as they see fit.

To me, the best objection to estate tax is the following:

Once you earn money, and have paid the taxes to Uncle Sam, who is a full partner for most high income earners, it is yours to do with as you please. You have paid your debt to the government. The government has no further claim on those assets that can be morally supported.

I would support a flat estate tax that started at the first dollar for everybody, and I would also support a repeal of the estate tax coincident with a repeal of DOD step up in basis that heirs receive on certain assets.

Both those things are fair.

A penalty for the rich and the frugal is not.

Besides, when someone inherits $1,000 it is as much a free boon, unearned, as it is when someone inherits $10,000,000. If you want to tax, tax them both.

20

Scylla: umm, run that example by again in slow motion?

First of all, this guy wasn’t farming or ranching for a living. He was a pilot. So this wasn’t the family business that the combination of the stock going through the floor (like the Enron employees, he shouldn’t have had all his eggs in one basket), and the unusual circumstances surrounding his death, caused him to lose. Since I didn’t know the guy, I’m not sure what it was, but for him, it was no longer the “family farm”, his livelihood and way of life.

And I’d appreciate a link to those other examples, because I remember waiting what seemed like a considerable time for you to come up with one, and then the thread dropped out of sight.

Speaking of dropping out of sight, that’s what I’m about to do, due to travel. See you in July.