The Estate Tax = Smart (The Universe In Balance)

Well, maybe not the universe, but at least this blog.

Balancing my earlier post on why the estate tax is bad comes this April Fools Day Editorial in the NYT:  The Forgotten Rich

I don’t think the rich have been entirely forgotten recently even though many of them wish they had been, but the article makes some strong points.  Speaking to the recent proposal by Senator Blanche Lincoln, Democrat of Arkansas, and Senator Jon Kyl, Republican of Arizona, the author derides what s/he says the point of their proposal:  America’s wealthiest families need help. Now

The two senators plan to propose an amendment to deeply cut estate taxes for the fraction of the top 1 percent of the population still subject to those levies.

The proverbial millionaires next door — the plumbers, contractors and accountants who amass substantial wealth through hard work and modest living — are not the intended beneficiaries of the proposed cut. The Obama budget already takes care of them, because it retains today’s law, which imposes the estate tax only on couples with property worth more than $7 million, or individuals with property worth more than $3.5 million. That means 99.8 percent of estates will never — ever — pay a penny of estate tax.

The heirs of the remaining 0.2 percent of estates are who Ms. Lincoln and Mr. Kyl are so worried about. Their amendment would increase to $10 million the level at which the estate tax kicks in. It would also lower the top estate-tax rate to 35 percent from 45 percent.

$10 million sounds high.  We’ve been talking around the office about $5 million as a reasonable exemption, but $20 million per married couple sounds high and starts to feel like we’re ratchening up the exemption at a geometric rate.  Their proposal seems an obvious foot-in-the-door for the wealthiest (and the loudest and fewest) of their constituents.

In addition to creating the false impression that the estate tax eventually hits everyone — by mislabeling it a “death tax” — opponents routinely denounce the 45 percent top tax rate as confiscatory. In fact, the rate applies only to the portion of the estate that exceeds the exemption. As a result, even estates worth more than $20 million end up paying only about 20 percent in taxes.

Another misleading argument is that the estate tax represents double taxation. In truth, much of the wealth that is taxed at death has never been taxed before. That’s because such wealth is often accrued in the form of capital gains on stocks, real estate and other investments. Capital gains are not taxed until an asset is sold. Obviously, if someone dies owning an asset, he or she never sold it and thus never paid tax on the gain.

If those arguments aren’t enough to stop the Lincoln-Kyl show, lawmakers should consider this: The estate tax creates a big incentive for high-end philanthropy, because charitable bequests are exempt.

The latter point cannot be ignored.  Charities should be all over this but their lobby is oddly silent.

The second point is observably verifiable, at least in my practice.  The vast majority of the assets of an individual’s gross taxable estate that I see on a daily basis have not yet been taxed.  The assets are often present in a qualified plan of some sort that were contributed pre-tax, are unrealized gains on marketable securities or are present in real property.  The obvious rebuttal to saying the latter two asset classes haven’t been taxed is by saying that those assets were purchased with post-tax dollars and taxing those asset’s values at death is double-taxation.  And that may be true, however, what is not taxed is the gain on those investments until they are sold.  You may have  purchased the stock at $50/share but when you pass away and its at $60 having split 3 or 4 times you haven’t paid a tx on any of those gains; gains which may have doubled or tripled the value of the stock.  The same holds true for real estate.  And when both assets are passed to your beneficiaries, they enjoy a stepped up basis so the assets then have truly never been taxed by that recipient.

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