“There should be a 65% estate tax”
Hillary Clinton
“There should be a 0% estate tax”
Donald Trump
As we all know, the Internal Revenue Code imposes an estate tax upon our assets when we die. The amount of the tax can reach more than 40% of the value of our assets.
Congress is considering tax reform this year. This includes the possible elimination of the estate tax. So today we are going to address some of the pros and cons so you can make your own decision.
Here are some thoughts:
- History
The estate tax was first enacted over 100 years ago. It was never intended to and did not raise significant money for the government. Comparatively speaking that is true even today.
Instead, it was designed to socially engineer our society. That’s right, it was a social experiment that became permanent. Its purpose was to prevent the concentration of great wealth in the hands of a few families (think Carnegie, Kennedy, Rockefeller, Gallo, etc.) from being passed down through several generations of the same family by using “dynasty” trusts.
Later on the estate tax rate increased to 77% and became essentially confiscatory. People had to sell their farms and businesses to pay the estate tax and part of our American culture was lost.
So Congress passed several partial relief provisions that were often of little use. The most effective ones were exempting the first $11 million in assets, reducing the tax rate to 40%, and delaying it until the last spouse passed away.
- Estate Planning
As a consequence of all this, a cottage industry was born. “Estate Planning” became the moniker whereby attorneys and accountants drafted and implemented an incredible number of expensive and time consuming schemes using elaborate computer software programs to create mind numbing documents. Such “plans” served little or no economic purpose and were routinely the subject of Tax Court litigation against innocent heirs who knew little about these schemes but paid enormous fees in defense of them.
- Charitable Giving
Today the estate tax affects only a very few rich people. One of the few productive ways they can reduce estate taxes is by leaving money and others assets to charity. Such gifts are exempt from estate tax. As a result, wealthy people often create foundations and transfer their assets to them in an effort to keep their lifelong successes intact and to reduce their estate taxes.
A good example of this might be the Gates foundation. As you know Bill Gates is one of the wealthiest men in the world and has left the vast majority of his estate to the Gates Foundation. Charities are most dependent upon these foundations. Most reasonable people would agree charities are far more productive and effective entities than government agencies and programs. Removal of the estate tax would dis- incentivize charitable giving.
- Double Taxation
Opponents argue the money has already been taxed once when the income was earned. It should not be taxed again at death. We should be able to do what we want with our property without government interference.
This is really a non sequitur. The income tax was designed to generate income for the government and to equalize that burden through progressive rates. The estate tax is an excise tax that is designed to prevent generations of concentrated wealth into the hands of trust fund babies. These two taxes have entirely different purposes.
No matter how many times an asset has been subject to income tax, whether or not it should also be subject to an estate tax is an entirely different consideration.
- In Summary
This issue will be front and center for several months and we will all have to consider the wisdom of whether we should keep the estate tax in place, repeal it, or modify it.
The political truth is many people are prejudiced against those who receive wealth that they didn’t earn. They are not a fan of those who marry into wealth, who inherit wealth, or the people who are successful by accident (often simply by being in the right place at the right time). Trust fund babies are widely resented. Typically these people are big fans of those who are honest and work hard and benefit from their successes.
One possible answer may be to keep the estate tax in place but increase the exemption amount so that it applies only to the extremely wealthy. Perhaps the $10 million exemption should be increased to $20 million or $30 million, etc. This would basically eliminate the estate tax as to all but the top .1%. Congress could also exempt certain types of assets, including farms, ranches, certain small businesses, artwork, and other culturally significant assets.
The super rich can then decide if they want to spend millions of dollars on phony estate tax plans and subject their heirs to tax litigation before United States Tax Court or whether they want to pass a large amount to their heirs and use the rest to set up charitable foundations that serve the community and the poor.
The reality is that today is no different than 100 years ago. It’s hard for many people to accept future generations of Trumps, Obamas, and others receiving undeserved riches because of the good fortune of their ancestors.
So there you have the main arguments on a really big tax issue. Government confiscation of our family assets or society being burdened with concentrated wealth in the hands of the undeserving for generations.
What do you think ?
David Leeper is a Board Certified federal tax attorney with 38 years of experience. He can be reached at 581-8748, by email at leepertaxlawelpaso@gmail.com, or visit leepertaxlaw.com.