“There should be a 100% estate tax”
“There should be a 0% estate tax”
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 is 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.
Let’s begin with the estate tax itself. This tax was first enacted nearly 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 that was 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 in 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 one was exempting the first $10 million in assets, reducing the tax to 40%, and delaying it until the last spouse passed away.
As a consequence of all this, a cottage industry was born. “Estate Planning” became the moniker whereby attorneys and accountant 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.
Today Congress is considering the repeal of this tax that affects a very small number of very rich people whose estates exceed $10 million.
Here are some thoughts:
- Destruction of Farms, Ranches, and Successful Businesses.
Opponents argue the estate tax is confiscatory, it breaks up the farms and ranches and corporations of successful people who want to keep them intact and pass them on to their family members, some of whom may have been working there for years.
Supporters of the estate tax question whether we really want to keep $100 million ranches intact for generations of often undeserving family members.
I think the issue here really goes to the amount of property we exempt from estate tax. Perhaps the present exemption of $10 million should be increased. Also, perhaps certain kinds of important cultural assets could be exempt, including farms and ranches, art works, certain small businesses that are not listed on the stock exchange, etc.
- Charitable Giving
One of the very few productive ways to 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 and trust fund babies. These taxes have entirely different purposes.
No matter how many times an asset has been subject to income tax, whether or not to be is subject to an estate tax is an entirely different consideration.
- In Summary
This issue will be front and center in 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 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 large number of 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 business stocks, artwork, and other culturally significant assets.
The superrich can then decide whether they want to spend millions of dollars on phony estate tax plans and press their heirs into tax litigation before United States Tax Court or whether they want 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 see future generations of Trumps, Obamas, and others live undeservedly rich lives because the fortune of their grandparents or great-grandparents.
David Leeper is a board certified federal tax attorney with 38 years of experience. He can be reached at 581-8748, by email at firstname.lastname@example.org, or at leepertaxlaw.com.
-The elimination of the estate tax may benefit Donald Trump in the same way as he may be able to convey billions of dollars to his children for many generations.
-For the most part these are simply shell games, transferring wealth in various forms so that the overall value was minimized in the eyes of the Internal Revenue Code but not in reality. It is a very expensive undertaking and concord literally millions of dollars. It has resulted in a huge industry that is essentially nine productive, massively overcharges rich people, and is in my view a blight on society.
-My father felt the worst thing you could do for a child was to give them money. He thought the best thing that you could do for them is to let them earn their way through life so that they develop skills to be successful and would appreciate those successes. Failure was a part of that. His thinking was that the gift of large sums of money, successful businesses, farms and ranches, etc. did nothing for the character of their children.