Surprise surprise!! Guess who opposes the repealing of the estate tax

Great Debates
61

I must have missed that in class. Perhaps you’d explain? Let’s say I have 1 million in my house, another million in rental properties, and a 2 million portfolio. Let’s also say I’m a widower, but I have a son. I’m 78 years old and have had two heart-attacks. How do I pass these assets to my son without estate tax?

**

What precisely can one do without a professional’s assistance?

**

Such as?

**

Yes. There’s an unlimited spousal exemption. This is a trap, not a benefit. It means the unwary lose their unified credit.

**

Totally bullshit. Please explain if you expect me to take this seriously.

**

I admire yoiur fortune telling abilities.

**

I have no idea what criteria you are using. Estate taxes prey on the elderly and the unsophisitcated, and subsidize the Insurance industry. Fear of this tax coerces individuals to give up control of their assets during their lives while they may still be needed.

**

Yes, usually when it’s earned, or when there is an exchange of goods and services for consideration. When was the last time the GOvernment got to take 55% when you bought a pack of gum?

**

Again, total bullshit. Though you are dead, the government still taxes you. You must file a final tax return, and your estate, not your heirs pays the FET. Your estate will be set up in your SS, not your heirs’. You pay the taxes.

**

Since you bring this up as your professional opinion, are you a CPA? A CFP? Or, a tax-preparer a la H&R Block? Do you make your clients aware of your attitude towards their wealth?

Really? I live in Central PA. I bought the farm I live in as a result of a forced estate liquidation. I have personally dealt with probably over 100 cases where farms or small businesses are in jeopardy or have been lost.

62

The dead vote all the time:)

63

Let’s do a little taxation “contrast and compare” exercise, just to see how unconscionable this estate tax really is. For convenience, let’s use the round number of $1 million to do our computations. We’ll assume a single person, so no spousal exemptions, no allocation of income, blah blah blah.

INCOME TAX:
The tax rate for an income over $250,000 is $79,772 plus 39.6% of the amount over $250K. 39.6% of $750,000 is $297,000. Adding that to the initial $79,772 gives us a total tax liability of $376,772.

ESTATE TAX:
The tax rate for an at-death transfer of $1 million is $248,300 plus 39% of the amount over $750,000. 39% of $250,000 is $97,500. Adding that to the initial $248,300 gives us a tax of $345,800. We then subtract the current unified credit amount of $220,550, giving the estate a total tax liability of $125,250.

So, unless you are leaving behind a very substantial estate, and you’ve done no estate planning, the estate tax, by comparison, isn’t a big deal. By 2006, the unified credit amount will have increased to $345,800 and estates of less than $1 million will pay no tax; the amount will thereafter increase in multiples of $10,000 to match inflation. And this assumes that our anti-estate-tax president doesn’t change the schedule.

Scylla, I understand the desire to keep money you’ve earned, but the problem is that, without an estate tax, money just accumulates in the wealthiest families and stays there. The Reagan era proved that, when the wealthy keep more of their income, they spend the money on luxuries rather than reinvesting in their business and letting it trickle down to the rest of us. I’d be very impressed if you could demonstrate to me any case in which the estate tax has been a disincentive to becoming wealthy.

(by the way, y’all shouldn’t take the above numbers as any kind of legal advice, m’kay?)

64

It’s not quite that simple, there is some confusion with estate & pickup tax, e.g.
From: http://www.cbpp.org/8-30-00sfp.htm

Thirty-five of the 50 states currently have an estate tax that equals the amount of the state credit, with
there being no other state estate or inheritance tax. In these states, the state law refers specifically
to the amount allowed as a credit against the federal estate tax. This is commonly referred to as a
“pickup” tax. A pickup tax provides revenue to the state but does not increase the federal estate tax
payment the heirs must make. Instead, the estate’s federal estate tax liability is reduced by the
amount of the state tax payment.

Some 15 states also have their own inheritance or estate taxes, a portion of which qualifies as a
pickup tax. In all of these 15 states, the state laws specify that if the amount of the state tax is less
than the credit allowed against federal taxes, the state tax is increased to the amount of the credit. In
cases where the state liability is greater than the credit, federal estate taxpayers receive a credit for
the portion of their state tax that equals the maximum allowable credit.
t. Voters in two of these 15
states recently passed measures to repeal inheritance taxes, which will lead these states to rely only
on the pickup tax. Another two of the 15 states are phasing out their separate taxes and will rely only
on the pickup tax in the future."

So it depends on what state they are in. Gates lives in Washington, right? which only has a Pickup Tax.

65

Oh, I get it. It’s O.K. to tax someoneone out of the home they’ve lived in for years. You assume that everyone will collect a “pile of money” when they sell. Bull!
Do I take your asinine post to say let’s tax old folks out of their homes and send them away? And where is this place that has such a lower cost of living? Mexico? What if folks don’t want to leave? Oh, tough sht says RTFirefly.
What if heirs don’t want to sell property to pay the estate tax? What if they grew up in a large home and it has sentimental value? Oh, tough sht says RTFirefly, let’s tax, tax, tax you out of what is rightfully yours.

Do you advocate floating people out on a block of ice when they get too old to afford being over taxed?

66

I’m gonna stay out of the main fracas here, except to say that some of you feel that inheriting large estates is a fundamental right while others feel that there is no inherent right to pass on fortunes or farms to one’s heirs (or receive said fortunes or farms). Until you guys tackle that issue, I doubt you’ll get anywhere.

Now, there has been much shouting, on the side at least, about who is being taxed by the estate tax. Those who oppose it have said it taxes dead people, those who do not say it taxes heirs upon the money’s transfer. Easy way to settle this:

Could a billionare with exactly one week to live choose to liquify all his assets, convert them into $100 bills, and will that they be burnt upon his death (assuming, of course, that a court would determine he was mentally fit to make such a decision)? If he can do this without paying an estate tax, then the estate tax is a tax on his heirs. If he cannot, then the estate tax taxes dead people. Tax professionals? An answer?

67

Varlosz:

I doubt the money gets burnt. You’re not allowed to destroy money. Being a billionaire, the man’s assets will be watched pretty closely, and both the heirs and the Government would object on several grounds.

Technically, the Estate of the Deceased pays any FET due. It is the executors responsibility to recategorize liquid assets into estate accounts (the same account with the deceased’s SS, just marked as deceased.) The money shouldn’
t go anywhere until a death certificate, a short certificate (showing that the executor does indeed have authority,) and in some cases an affidavit of domicile (for state taxes,) are on file with the institution.

Some accounts like IRA’s, annuities, and transfer on death accounts have designated beneficiaries and these pass without probate and go directly to the heirs. In most cases, if there are taxes due on these assets they are payed by the executor through the estate. The government may place a hold on these assets if they feel that payment is in jeopardy, or seek payment from the heirs if it is not picked up by the estate.

For anybody that’s had any dealings with this, it’s pretty clear that the estate pays the taxes (that’s half of why it’s there.) The estate usually functions under the deceased’s SS #, and final year income taxes owed by the deceased are also paid out of the estate.

In short, the deceased pays the taxes through his/her estate.

As far as the right to pass on an asset goes, I look at it like this:

Your entire life, the Government is a full partner. It takes a full share of everything you earn. What one does with what is left is one’s own business. People make the false comparison of estate and sales tax. What is sales tax, 6-7%

FET hits 55% percent very quickly.

It is horrendously complex, being an entire area of law, taxation, and Financial management unto itself. Because of its complexities and hidden traps their have been cases that I have personal knowledge of where 92% of an estate has gone to tax.

The estate tax is a confiscatory tax, that’s all. Even supporters like Buffet say this.

There is the premise that you don’t own what is yours, and the government can just take it. You don’t get to choose what you do with your own property. There’s a lot of bitterness towards rich people, and part of the argument is “screw 'em, they got more than their fair share. Take it.”

Most wealthy people that I know got that way by working hard, and being succesful. I know a guy that owns 6 dry cleaning stores. He started himself worked his ass of for 40 years top build his business. He employs 30+ people works 18 hour days, and some weekends, and he can tell you absolutely everything you ever wanted to know about dry cleaning. His children have been in the business since they were teens, and he would like to see it passed on to them. It’s always been a sole proprietorship, and most of the assets are in property and equiptment.

The gentleman may not be insurable, and if he’s not, he will probably close 3 of the businesses at death and sell the assets to pay the tax.

Additionally, a large portion of his remaining assets are tied up in a retirement plan where they will get slaughtered when he dies, closing that avenue.

The business may not survive him.

68

VarlozB, an interesting question…but I don’t really think it would settle the issue in anything but a very technical sense. I think the point of those of us who say it is a tax on the heirs is more to the point that its effect is felt on the heirs, i.e., “you can’t take it with you”.

In actual fact, I am also not completely in one camp or another on this point…If I really thought one should look at this only from the point-of-view of the heirs and not of the person who dies, I don’t see how I would be able to justify any inheritance transfer of wealth at all…I.e., I would be forced to propose a completely confiscatory tax.

Allowing ridiculous sums of money to be transferred to heirs, as we now do, even though that violates basic notions of equal opportunity for all when you consider that younger generation, seems to me to be implicitly acknowledging some foundation in the argument made from the point-of-view of the one who dies…i.e., that those who accumulate wealth should be able to decide where much of it gets to go upon their death.

69

Ok. I suspect that most people feel some sympathy towards an owner of a corner grocery store or laundromat. I also suspect that most (not all) think that Sam Walton, Bill Gates or Warren Buffet should be subject to an estate tax. All 3 are, IMHO, good men (I didn’t say law-abiding men), but that doesn’t mean that my benevolence towards them extends to their kids (at least not to the tune of a couple of billion dollars).

But there are also cases in between.

Questions:

  1. What’s the value of, say, 6 dry cleaning stores? Of 1 dry cleaning store? Please also comment on the proprietor’s probable ownership of real estate. Or, say, what’s the value of a (single) large supermarket? A comparison between the value of existing “family farms” and existing estate law as it applies to farms might also be interesting.

  2. [hijack] He’s a sole proprietor? How much liability insurance does the guy have? Has he considered incorporation for the purposes of securing limited liability? [/hijack]

  3. I understand that estate taxes are horrendously complicated. Why is that? Couldn’t they be simplified? Or is the process of estimating wealth inherently difficult?

70

>1.The head of RIA has said that with proper planning up to 4Meg can be sheltered from the Estate tax.

>2 Give 10K of assets away tax free every year to each heir. Or, leave everything to the spouse.

>3 The “Family owned business deduction”- IRC2057, and the Special us valuation, IRC2032

>4 For most purposes- you can leave 100% of everything to your spouse, with no Estate tax- or just “her 50%”- just how is this a trap?

>5 The “final return of a decedant” is regular Income tax- not estate tax.

>6 An Enrolled Agent- “Enrolled to Practice”- and you?

>7 But that is not nesesarily due to Estate TAX- it could well be due to overdue property taxes, excessive probate costs or many things. So tell me- how much estate tax did this “family farm” owe- and how much was it worth? What most folks think of as a “family farm” would normally be except from estate tax.

71

In America, you don’t own money. Money owns you.

I am especially struck by the timing of all this. Does it strike no one else as peculiar that these tax issues are at the very tippy-top of the GOP agenda? And not campaign finance reform? Odd, isn’t it?

Was it only weeks ago, they were bloviating “Economy is doing great! We can afford a whopping big tax cut!” Now its, “The economy could be in trouble! We need a whopping big tax cut”. What next? “The ozone layer is disappering! We need a whopping big tax cut!”

And how, exactly, in America, does one earn a million dollars? Stoop labor in a lettuce field? Social work? Teaching? Garbage collection? Or sitting in an air-conditioned office, shuffling paper, attending meetings, and looking for new ways to lower labor costs? What is it, exactly, that the rich contribute to society? About as much as a tick on a dog’s ear contributes to the dog.

72

I don’t see that, Izzy. I think the analogy is very strong - if we privatize Social Security, it will force everyone to be a portfolio manager, ready or not - and millions of Americans aren’t, and will be at least relatively poorer for it.

People whose estates may rise to the level of estate taxability due to the value of their farmland, but who have otherwise never had much extra money (and consequently hadn’t even thought of hiring an estate planner), are in exactly the position those people will be in.

I think, though, that this is better as an argument against privatizing SS than for expecting such people to have done estate planning.

I agree with Scylla that tax minimization that one needs highfalutin’ advice to achieve, amounts to a hidden - and unfair - tax on the sort of people I described in the previous paragraph.

Much of the complexity of the tax code is a response to complex ways of owning income-producing investments. If you’re gonna have ‘derivatives’ (at one time, a derivative was merely a function f’(x) that told you what the slope of the graph of another function f(x) was; now it’s a funky way of investing in the stock market), taxing them fairly and appropriately isn’t gonna be simple, and you’ll have one more section of the IRC that looks like it’s written in tongues. But the people who invest their money in complicated ways have put themselves in the position of dealing with such tax complexities.

But when people hold property and earn income in simple and straightforward ways, figuring their taxes should be simple as well, and they shouldn’t need highfalutin’ advice ahead of time to realize whatever breaks the tax code has for them.

In particular, I agree with Scylla that one shouldn’t need a special clause in one’s will to realize both spouses’ exemptions in passing their estates to their heirs. If, for instance, a married couple was to die at different times this year, whatever portion of the $675K exemption that the first spouse to die didn’t use, the second spouse ought to be able to use on top of his/her own $675K exemption, regardless of whether they even had wills.

Izzy:

I’d have to disagree with the assumption that the FET is widely regarded as unjust. Given that the number of Americans whose estates are subject to it each year numbers only in the hundreds, I think it’s safe to say that most Americans don’t have much of an opinion about the FET at all. There was no widespread groundswell of opposition to the FET, other than that created by the GOP’s ‘death tax’ PR campaign. And I’d be willing to bet that even that opposition is shallow and transient in nature.

Most people have no idea what the estate tax rates are, or where they kick in.

I agree with this 100%, Izzy.

73

[QUOTE]
*Originally posted by Scylla *
**

There isn’t. What the estate gets, in such cases, is the flexibility to wait 5 years and 9 months before paying any FET, and paying it off in 10 equal annual installments starting at that time, with the last payment 14 years and 9 months after the death in question.

I don’t know how long this has been the law, but it’s the law as it stands now. FWIW, I found this provision in a cursory 10-minute reading of the instructions for the FET return.

I agree that it shouldn’t be a trap (see my response to Izzy) - that aspect should be changed. But even as it is, this says that the surviving spouse isn’t vicitmized by the FET - only the heirs. (Yes, I know the estate pays the tax - but the person whose estate it is, is beyond our ability to aid or harm at that point. In terms of consequences, what you’re saying is that the beneficiaries’ inheritances are reduced by the trap.)

Daniel’s right about this, unless inflation ceases to exist. The exemption will be adjusted for inflation.

Whoa Nelly! Let’s parse this one slowly.

The ‘unsophisticated’ victims here are presumably those who didn’t get estate planning advice. Those who give up their assets while still alive to reduce the portion of their estate subject to tax are presumbly those who did. And while it irks me that the insurance industry has a stake in keeping the FET alive, their support for the tax doesn’t negate the possible validity of other arguments for the tax.

Again, the estates of the elderly pay the tax, but their lives are not impacted by the tax. Admittedly, there are people who get obsessed by tax avoidance, and put that ahead of living their lives sensibly. If they decide as a result to give their assets, while alive, to heirs who don’t have their best interests at heart, my take is that they have fallen victim to their obsession, not to the tax code. They know the tax code better than they know their family, and nothing can be done for that sort.

I’d still like to see a detailed case history of one of those, under the current law. I genuinely don’t understand how the long-term payoff arrangements can fail to protect a farm or closely-held business. And without understanding how the current law falls short, it’s hard to propose solutions.

If my memory hasn’t totally failed me, provisions for payoff of FET over many years, for farms in particular (I can’t remember about businesses) were already in the code a couple of decades back when I was a trusts-and-estates paralegal. I think the period for paying the tax may have only been 10 years then, but I’m sure the idea isn’t recent.

But if the FET has forced liquidation of farms or businesses under old tax laws that would have been preservable under current law, that’s no argument for changing the current law.

74

Disagree, for the reasons mentioned. But I’ll leave this for another thread.

I don’t know if there was a spontaneous groundswell of opposition to the estate tax. There’s rarely a groundswell of spontaneous opposition to anything. But the issue does seem to resonate with alot of people, (including many in this thread alone) - whether many or most, I couldn’t say for sure. At any rate, it is this issue that DITWD was addressing with his response about estate planning. I consider his response was inadequate, and you indicate that you feel the same way, so we are at peace.

75

Uh, unless you are self emplyoyed I’d be willing to bet the guy who owns the company you work for is probably wealthy. Or maybe it’s a group of wealthy people. When was the last time you asked a guy living in a box to give you a job?

What I see here is an intense hatred for people of wealth.
If I were to substitute the words “blacks” “Mexicans” or “gays” with the same disdain as some of you have for the rich, you all would be calling me a bigot. Let’s face it, some of you are seething in hate of the rich or those of us who are in a position to inherit from the rich, and you use taxation as a form of revenge.

76

First, shouldn’t participants in GD know that anectdotal stories are not terribly good evidence. In fact they’re not evidence at all really. Any action of any kind, any tax of any kind, any policy of any kind will involve differential effects. Some folks are going to gain, some are going to lose (relatively or absolutely). We need to look at the aggregate picture for gains and losses, not individual tear-jerker stories like techgirls etc.

As in trade, the question should be do the results of the policy in question result in a larger gain for society and no absolute losses, so that a pareto optimal result – that is a result in which all can gain with proper compensation.

It strikes me that Buffett’s(*) analysis, which is actually in the context of his larger writings something along the lines of a practical libertarian’s, I repeat here for everyone’s benefit:

In essence, Buffett is opposed to economically inefficient rent-seeking behaviour, which appears to be precisely PBbites et al’s behaviour.

To quote capacitor:

An estate tax serves two positive policy goals for a capitalist system:

(1) reduces direct inter-generational wealth transfers, with the intention of preventing excessive accumulation of wealth among an idle and ultimately non-competitive inheriting class.
(2) Provides funds (since governments can not operate without taxes/funds) for productive investement in public infrastructure/services.

Point 1 strikes me as the most important as we have empirical evidence that excessive concentration of wealth retards economic growth. Or rather is significantly correlated with low levels of economic growth. The why is probably not answerable except by looking at individual examples, but it would seem that likely factors are:
(a) low investment in public infrastructure (up to and including education) impeding growth
(b) uneconomic use of accumulated capital among the elite
© reduced rewards for competitivity (e.g. undermining merit)
(d) increased rent-seeking behaviour to protect inheritance rather than create new wealth.

Come to think of it, this decribes my host country! Of course not to say that this sort of dim scenario would hit the USA overnight, however neither do I see any substantive reasons to repeal the tax (vague hand-waving arguments about fairness and blind ideological opposition(***) to taxation not being substantive in my mind.)

So, in the end if we’re talking about rational cost-benefit analysis for a society as a whole(**) the estate tax wins all around. I can see rational arguments against income taxes and sales taxes --necessary evils perhaps-- but not estate taxes (if properly structured).

(: As an aside, I have read that Buffett is so dedicated to his economic principals that his children are not slated to inherit. He wants them to earn what they get, for their own good or something along those lines. Not sure if I could do this, but one can’t accuse Warren of hypocrisy.)
(: anticipating the objection of ‘social engineering’ I simply respond all policy is social engineering including no policy. The proper question is it effective, and I think this means productively market-oriented while also responding to the desires/needs of the society. --low growth policies could be a positive decision for some societies…)
(: It strikes me that this kind of opposition is an example of the ‘free rider problem’ from game theory.)
Now, PKbites.

Hmmm, I count one (but perhaps a few more) comment that may be construed as anti=wealthy. That hardly qualified as intense hatred. It strikes me that you’re (1) making a mountain out of a mole-hill (2) making baseless appeals to emotion in the place of rational analysis. So, how about leaving off spurious comparisions with blacks, Mexicans and gays and dealing with the issues at hand.

77

Even if I accept your arguments, Scylla, IzzyR, and other estate tax opponents… at best you’ve presented reasons for modifying and simplifying the tax – not eliminating it.

Take Scylla’s dry cleaner friend… ironically, eliminating the estate tax will make such entrepreneurs less powerful less important to the economy than the children and children’s children of such individuals. From a societal perspective, eliminating the tax increases the relative wealth (and therefore power) of heirs to entrepreneurs. This is the central argument of Buffet et al. and one that opponents of the tax seem unwilling to address.

One could take this argument to the extreme and support a truly confiscatory rate of 80-100%. Whenever I hear Steve Forbes speak I wonder if this might be a good idea. However, I think on balance we’ve reached an effective compromise.

We already live in a plutocracy, at least if you look at the financial standing of our congressional representatives. “Heir-itocracy” would be even worse.

78

pkbites:

In a perfect world, pkbites, there would be no need to tax anybody on anything, because the revenue for the services we want government to provide would appear out of thin air.

But we’re not in such a world, so taxes are necessary, and any tax is going to have negative consequences for somebody. The goal (as I see it, anyway) is to minimize those consequences. (See my post, “In Defense of the Estate Tax,” on the first page of this thread, for my guiding principles in that respect. Like I said to milroyj, feel free to challenge the appropriateness of those criteria, or explain how I’ve misapplied them to the estate tax.

If the homes in question are the main reason the estate is taxable (which was Milo’s point), then they’re worth a lot of money, so they should sell for a lot of money. They’ve increased in value because rich people have bid up the prices. What am I missing here?

Maybe you missed the part where nobody has to pay the estate tax until after they die.

There are many quite wonderful places to live in this country that have very low costs of living. I recommend Bristol, VA/TN, where I lived from 1993 to 1998. When we moved there, we bought a 2000 sq.ft., middle-class home for $68K; when we left, we sold it for $79K. If you and one sibling have just sold a house for a million bucks because you couldn’t pay the estate taxes on it, you take your half of the proceeds, buy a house in Bristol, invest the rest, and live off the income. (Can I trade lives with you?)

People get forced out of their homes and ways of life all the time for a variety of reasons. (For example, take those who were pushed off their property so our current President could become rich.) As I’ve indicated above, the people that Milo describes have options; there are many people who are forced to move who have none. I’m gonna sympathize with those who’ve lost what they have, and not gotten a dime in return, way before I worry about the problems of those who lost their way of life, but pocketed a nice windfall in the exchange.

I missed the part of the Constitution that decreed to each individual a right to perpetuate their parents’ way of life.

No, but I advocate floating you out on a block of ice until you learn to think instead of rant.

79

IzzyR: *One thing that is annoying is this constant refrain of super-rich people calling for measures that are purportedly harmful to themselves, but are really sticking it to people far less wealthy than themselves. These people are sanctimoniously cloaking themselves with an undeserved glory. […]
VarlosZ writes that “It continues to amaze me that the repeal of the estate tax, a measure that could favor only a fraction of the top 1% in income and wealth to nearly everyone else’s detriment, continues to receive popular support at least approaching 50% (depending on who you believe).”

What continues to amaze me is that people are amazed that people could base their principles on anything other than self-interest. *

Izzy, I think you’re being rather inconsistent here. Why is it that non-wealthy people who favor the repeal of the estate tax (which would not help them personally) must be assumed to be acting upon “principle not based on self-interest”, while wealthy people who oppose the repeal (which would help them personally) can be dismissed as “sanctimoniously” posturing for “undeserved glory”? Surely you don’t believe that wealthy people are less capable of acting in a principled fashion than non-wealthy ones, do you? You and pkbites both seem to want to insinuate that anyone who opposes the repeal must be doing so out of some reprehensible motive—envy and greed in the case of the non-wealthy, self-aggrandizing grandstanding in the case of the wealthy.

But as other posters have pointed out, there are in fact lots of sound economic reasons to favor retaining the estate tax, irrespective of its effect on one’s own personal finances. I don’t think it will be much use to try to distract people from these broader issues by impugning their personal motives.

80

That’s okay, I’ve never called for outright elimination in this thread. I’m undecided about that issue. I don’t think the reasons presented here are justification enough to do it - the government should not be in the business of taking people’s money away in order to encourage them to work harder, which is what the Buffet line boils down to, in essence. But I don’t have as much of a problem with treating an inheritance as an opportunity for the government to take in some needed cash from people who can now afford it. As long as it’s not overdone.

RTFirefly,

Based on your latest post, I assume that you also oppose rent control. :slight_smile: