Interesting article about the estate tax (in Links)

http://www.thenation.com/article/37889/no-oligarchy

It is crazy how the tax code works in this country. I wish they would completely rewrite it, make it one set percentage for everyone, cut out the corporate off-shore tax evading, and cut out all the millions of pages of regulations. But it will never happen.

I went through financial planning/estate planning in college and moved into estate planning as a short lived career (I ran like hell when I realized how illegal & unethical my small company was). Listening to uninformed middle-class citizens whine about the "death tax" is still something that blows my mind. Most of the people I spoke with who were against it just regurgitated talking point they previously heard and had no clue it was something that benefited them. Then again, these are the same people who would argue 'til blue in the face and not even know what the unified tax credit was.

Then again, my job was to smile, take their money, and invest it in something that heavily benefited the company. On a side note, don't ever fully trust estate planners.

Just say no to hard drugs and the so-called "fair tax."

Actually, the fair tax COULD work (and similar systems do work in other countries), but it's just too likely to be a failure in the U.S. while still granting protection to the uber-rich.

As long as we have "progressives" who believe in a progressive tax, we will never get what we really need in the US. A Fair tax.

Where everyone pays a fair share of what they earn, after a minimum amount that is deems to be needed for essentials of living.

The estate tax is another issue. I am against it as it is a form of double taxation. Taxed once when you earn it, and again when you die and pass it on to your heirs.

I don't care to waste time in a debate in which neither Ranger nor I will change minds, but I'll summarize my stance with this:

I (and the lawmakers who created our system) am progressive because of a clear need to even the burden based on appropriateness and wherewithal-to-pay. Without a progressive tax, we would have a worsening class system where the rich get richer, where the poor would get poorer, and where the middle class get stuck with a slightly higher burden than before. However, since we can't drive the poor into homelessness and starvation, they would have to be protected. That means that their portion of the tax burden would be spread amongst the rest. In turn, that means that the rich pay a negligible amount more while the middle class absorb the blow.

The above is more noticeable in a flat tax than it is in a fair tax, but the effects still exist.

The reason I said that neither Ranger nor I would change our minds isn't a claim of stubborness, it's because the preference is value-based. We have a progressive system because people felt that the rich should pay more, and the "estate tax" was created to avoid deteriorating into a class system. Ranger likely feels that the rich shouldn't pay more because they earned the money, and that they should be able to keep it within the family forever for the same reason. You can't change values with an online debate.

Demi, can you explain what you mean regarding the death tax and how it earns money for the middle class? I don't understand that.

I do know that I hate it, and I know why -- mostly for what Ranger has said. The money was earned once and taxed once. The death tax is taxing it a second time. How does that benefit me?

I'm asking in earnest, because I'm going to have to deal with it all pretty soon, given the age of some older family members and the size of the estate in question.

I'm assuming the argument is that without those revenues the government would have to be taxing the middle class more. Only other version I could see is the argument that because the government spends that money, dividing it between government employees, defense contractors, and public works projects rather than allowing the descendants of that the deceased to keep it, it helps the economy. Which seems to me to make about as much sense as trickle down theory.

What I'm interested in is real world examples of sustainable prosperity for individuals that don't involve a heavy handed social democracy.
In my short time on this earth I've watched at least three cases of massive bubble type boom and crushing debilitating pop. In each of these cases it resulted in the quality of life for the typical person going down, and the divide between ultra-rich and normal growing.
The result is that the morality of hard work and honest living are seen as passe. This is not a sustainable path for anyone involved. Even the ultra-rich will eventually pay the piper as society breaks down. The lesson we've taught to the younger generations is sick, and I think it's atrocious that the conservative minds in this country are too busy playing a political game and abusing the ignorance of populace to care. A real conservative from another era would have been crushed to know that the ideals of right living have been supplanted by power hungry fools and demons posing as shepherds.

First off, I never said it "earns money for the middle class." That doesn't make sense. Secondly, there's no tax for dying.

But taxing large estates at transferrence is a way of shifting the tax burden away from the middle and lower classes that would otherwise get assessed through other means (eg, income tax). Also, remember that if your late relatives were married and passed the estate in 2009, the first $7 million dollars aren't taxed (unless they blew their unified tax credit transferring a crap load of money earlier). Is the estate really larger than that? Maybe it was just one person, but even that means he would have to transfer more than $3.5 million before ever getting taxed a penny.

Or did they pass on in 2010? 'Cause... you know... there is no federal estate tax in 2010.

Again, it's a value issue. If you think that an estate worth over $800 million should transfer freely, then that's your value. If you feel that the transferrence of massive estates should be taxed to ease the overall tax burden (hi!), then that's a value as well.

Allow me to try this from a different angle. You wonder why anyone would tax an estate, after it has been taxed. You call it a pejorative, but I call it necessity.

Let's say a $400 million estate is passed on to a daughter. She has the estate until passing on 35 years later. Let's give a market average of 8% and an inflation average of 3%. In this over-simplified example, that means she'll transfer an estate inflation-adjusted (real) value of roughly 2.3 BILLION. She didn't earn this money, she inherited it. But at passing, her son inherits the wealth. He passes on 30 years later. Now the real value is $10.2 BILLION. 33 years later, he dies and gives it to his son. Now the inflation-adjusted value (in today's dollars, mind you, not future dollars) is almost $178 billion. What did he do for the money? Jack crap. The argument of "earned" is flimsy in estate transfers.

Granted, it ignores however much the people are withdrawing to live, but it also ignores anything that's added to the estate as well. When we're talking about "rich," not upper-class, we're talking about people who live off of less than the interest earns -- people who've done nothing to earn it.

You don't see anything wrong with this? No? That's because it's a personal value. I can't say where the unified tax credit will end up, but I'm against class systems and would like to see the first few millions (today's dollars) as tax exempt with the remainder taxed at transfer.

I don't understand your example, even in its simplified state. You are leaving out the capital gains tax. Isn't that the issue? It is for me, at least. The government says "If you earn money through 'this' method, tax it one way. If you earn it through 'that' method, tax it another way." However, in the case of estates, if that estate grows in value, it's taxed on that growth, and taxed again on transfer.

Regarding your previous post, it would seem, then, that novice's first assumption is correct. You think that the estate tax is good because it means the government has to take less money from income tax. I find that argument kind of flimsy, but passable.

Your second post is pretty odd, though, for aforementioned reasons.

The hatred towards the death tax is that it's the government double dipping on the taxation. Your example appears to make a lot of sense because you are skipping the double-taxation issue altogether. Put the capital gains tax back into the equation, and run your numbers again.

I don't see why you consider it double taxing. When you transfer anything of enough worth it should get taxed in some way. It doesn't matter if a person dies to make it happen. You didn't earn that, they did and it is getting transferred to you.

So, if I donate 100M dollars to a charity, should it get taxed Nat?

Does the tax dodge from Shawshank Redemption still stand? ;)

Also, I know some family farmers with over 3.5M in assets. My grandpa has a farm and cattle purely run by himself, with a few farm hands now and then, and his estate and cattle are easily with 1.5M. He sold less than half of his just land (no house) two years ago for 600k. It takes a lot of land to run a profitable farm.

Titan, you don't get taxed for giving money away. You get taxed for receiving it.

Regardless, should the charity get less than 100M?

A charity isn't a person, or a profit corporation.

They pay tax on all the money they have earned over time. Whether capital gains or income tax.

It is the principle that was INITIALLY earned and INITIALLY taxed that I object to being taxed twice.

I understand Demi's point about the middle class. If the "rich" pay more via estate tax, the middle class pays less to keep the overall government income the same. However for me this is a flawed discussion as it phails the fairness test. Is it fair to double tax? No.


I completely disagree. In the US, where I suspect you are writing about, the "poor" are hardly bad off. The "poor" are far better off now than they were 50 years ago even with the 3 bubble pops and booms you type about.

The average "poor" person, as defined by the government, has a living standard far higher than the public imagines. The following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:

* Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.
* Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.
* Only 6 percent of poor households are overcrowded; two-thirds have more than two rooms per person.
* The typical poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the averagec itizens in foreign countries, not to those classified as poor.)
* Nearly three-quarters of poor households own a car; 31 percent own two or more cars.
* Ninety-seven percent of poor households have a color television; over half own two or more color televisions.
* Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
* Eighty-nine percent own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

http://www.heritage.org/Research/Reports/2007/08/How-Poor-Are-Americas-Poor-Examining-the-Plague-of-Poverty-in-America

Mind you that study was in 2005-6. Since then the percentage of TV/DVC, microwaves, etc.. has to have gone up.

And did you know that 47% of all people in the US for the 2009 year paid NO federal income tax! How fair is that?

The "fairness" test... please.

Your argument is that it is an inherent right to leave your entire estate to the individual of your choosing. All Demi is saying is that he doesn't believe that to be the case. He even gave reason why he believed that.

Military personel fighting in combat zones pay no taxes for the months in the combat zone, how fair is that?

Also it passes the fairness test just fine.

Do you expect to pay taxes on your $50,000 you get from your boss for working this year?

Do you expect to pay taxes on your $50,000 you get from your grandfather who passed away this year?

Why would one source of $50,000 be fair to tax but the other source of $50,000 not be fair to tax?

The tax is to avoid really rich families from stockpiling wealth from generation to generation.

If you want to avoid it completely you should just donate all of your accumulated wealth to charities at the end of your life and not pass it on.

Yep, I skipped over it on purpose, as it isn't relevant. The estate tax and the cap gains tax are two separate entities existing for two separate reasons. Cap gains tax serves to tax unearned investment income while the estate tax serves to do what I mentioned before. You're probably thinking "duh, that doesn't change anything," but you got it wrong earlier. Here's why:


There is no double-dipping taking place. Let's put cap gains back into the equation. The final number I gave on the $400 million estate being transferred sans estate tax was $178 billion. Let's say that half a year after receiving $178 billion, the newly rich super-duper lottery winner of an heir cashed out everything and went to buy Vegas. That means that $178 billion minus the applicable cap gains tax equals... $178 billion. When you inherit something, there's a step-up in basis. The heir's basis is set to the value six months after death, meaning there is no unearned investment gain. I left out cap gains because there are no cap gains.

In my first post, I mentioned people arguing "'til blue in the face." You're certainly not doing that, but using the pejorative "death tax" belies the belief that you want to learn how estate transfers actually work.

(As a quick aside, if any of the investments drop in value during the six months following death, you can elect to use the basis at the time of death, meaning you inherit a valuable-for-tax-purposes loss, which offsets any possible unearned investment income from other sources)

No, since those making under 50k a year in 2009 payed close to $0 federal income tax. At that income if you live in a state with state income tax you may pay a bit, but I live in Florida where there is no income tax. Increase the amount to 500k, then yes, I would pay income tax as I produced an item or gave a service that generated that pay. I PRODUCED something, whether goods or services.


No, as I did not produce anything to generate the money that my grandfather already paid taxes on. So I expect to pay no taxes on money I did not generate anything for.


See above. To sum, in the first case, I produced something to generate that income. In the latter, I did nothing to generate that income and taxes were already paid when that income was generated via production by my grandfather.


I guess what is fair me for is different than you novice. Until you own your own small business and stop working for "the man", you will never understand or see my point of view. I have worked for "the man" and have experienced both sides.

If you mean the gifting of money every year to your children, then yes.

You can give 13k a year to each child to avoid paying estate taxes down the road.

Most people I know that have some degree of wealth use this "dodge" to stop the government from taking their heirs money when they pass on.

Just out of curiosity, under US tax laws, if my living grandfather were to transfer 1 mil to me would it be taxable?

Bonuses from your place of employment is a form of income no matter how it is done and should be subjected to normal income taxes.

Capital gains is a different issue altogether and should not be wrapped up as income tax.

Now can you explain to me why a spouse should have to pay anything for transferring titles to their name? The spouse already paid taxes on the money used to gain the capital wealth being taxed.

The tax was created in 1916,
to help the US recover from WWI
to prevent buildup of wealth from a few concentrated families

The death tax is no longer a vital source of federal revenues. In 2008, it raised about $24 billion, just above 1 percent of total federal tax collections. This is down considerably from 1940, when the estate tax raised more than 5 percent of all federal revenue.

Who Benefits from this tax today?
Estate Lawyers and Planners.
Insurance companies.
Large Corporations.

Who Loses?
Family owned businesses.

Most family owned businesses grow as fast as they can sometimes in order to get the most return on their investments. When someone dies, you have 9 months to pay up the tax or else the government will liquidate your assets and auction them off, and in many cases it will sell well below market value thus you will lose more than the 45% of your capital gains.

Job Market.
When the family owned businesses are forced to liquidate, they can't keep growing, thus they stop hiring for a long while.

Employees of the Family owned businesses.
Wages get frozen/reduced, benefits suffer because the family doesn't have the cash to pay for these things.

That's a gifting issue. He can gift $13,000 per person each and every year without incurring taxes. For example, if he gave you $13,000 last year as a gift and another $13,000 to your cousin, he can do the same this year without a penny of tax.

When you exceed $13,000, you have a choice. You can either pay taxes, or you can use part of your lifetime limit within the unified tax credit. That limit gets a bit wonky, but just know that your living grandfather can give you $1 mil without paying anything in taxes.

Yes Loch,

http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States

But as Demi stated, 1M is a once in a lifetime exemption.

So transferring a 400mil estate:

While alive = taxed
Minute he snuffs it = free?

Who says dying is all bad then eh?

(and no, I don't have anyone leaving me a 400mil estate, or even 1 mil for that matter)

Loch,
Only if they die in 2010, otherwise you'll pay about 140-200 mil in capital gains. If I understand this whole death tax correctly.

In 2010 the is no US estate/death tax.

Nobody knows what will happen next year.

At it's worst it was a 5 mil exemption and then 55% tax IIRC.

There is some thinking that whatever Congress does may be made retroactive to this current year.

Absolutely wrong. Reread the part I wrote about cap gains and the step-up in basis.

So then how much will he pay in Real Estate transfers and Capital Gains taxes?

Real estate transfers are beyond the scope of the topic -- that's a different issue depending on other factors. But as for capital gains, an heir only pays taxes on growth that occurs while he or she owns it.

Example:
Your grandfather purchases investments of $3 million. At passing (in 2010), he bequeaths to you the investments at a value of $10 million. The $7 million gain is ignored, and your basis is now $10 million. If you sell the investments promptly, you pay nothing in cap gains, because 10 million sales price minus 10 million basis equals zero taxable profit. Likewise, if you sell the investments for $11 million, you have $1 million of unearned profit to be taxed accordingly.

A progressive tax is a fair tax. The tax rates where they are now are the best they have been since I've been in the workforce, which is to say quite a long while.

On the issue of the state tax, the last people on Earth who need a tax break are rich dead people. Now I do support an exemption on up to $10 million for small business owners and farmers like Titan described. After that, tax these estates into oblivion!

And if you want to look at it from the perspective of the one getting the inheritance, I agree with what Wrathlin said. You get taxed on $50,000 that you earned. You should definitely get taxed on $100 million that you didn't earn.


I make a bit under $50,000, and I certainly didn't pay 0% in federal. It wasn't much, but I certainly paid my fair share. Even more in state, but that's irrelevant to my point.

Bleh. "Estate" tax.