On the Estate Tax

[Fantastic Anarchist]

I was in a "debate" with someone on Reddit regarding the Estate Tax. His question was the standard reactionary one: The income is already taxed and "why should I have to pay for the takers." You know, the ignorant tripe that doesn't require critical thinking skills.

So, I thought I'd share my response for those who are interested. It doesn't affect nearly the amount of population that the reactionaries would have you believe. I mean, if you believed their arguments, you'd think the end of civilization is nigh!

My response:

To prevent a disproportionate accumulation of wealth and economic royalty. And estate taxes only tax above a certain amount. It's not like everyone who receives an inheritance has to pay taxes on them.

As noted above, a certain amount of each estate is exempted from taxation by the law. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption. For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means the estate would have paid a taxable rate of 19.7%. As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. That is, had no further legislation been passed, the estate of a person who deceased in the year 2010 would have been entirely exempt from tax while that of a person who deceased in the year 2011 or later would have been taxed as heavily as in 2001. However, on December 17, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstated the federal estate tax. The new law set the exemption for U.S. citizens and residents at $5 million per person,[26] and it provided a top tax rate of 35 percent for the years 2011 and 2012.[27] On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond.[28] The permanence of this regulation is not ensured: the fiscal year 2014 budget called for lowering the estate tax exclusion, the generation-skipping transfer tax and the gift-tax exemption back to levels of 2009 as of the year 2018.[29]

So, currently, only those inheriting $5.25 million or more are taxed, and only for the amount above the exclusion amount. If I recall correctly, this only affects ~0.3%* of the total population.

*This figure for 2014 is probably even lower since Congress raised the exclusion amount.

Wikipedia: Estate Tax in the United States

[Stallion]

1. Its a Millionaire's Tax

remember Husband and Wife can each claim the exemption amount with proper planning too

[Fantastic Anarchist]

2. Yep, so even less of the total population. ;)

[badtoworse]

3. Time to set up a trust.

[Warpy]

5. That gets your estate away from probate

which saves heirs a bundle. I was able to talk my dad into a revocable trust (he could revoke it if I turned to crime, in other words) and I have to say that the whole business went smoothly when he died.

However, if you're leaving a real empire of tens of millions on up, your heirs will still have to fill out their estate tax forms and pay their estate taxes, Federal and state (if the state has them).

One plutocrat loophole has always been endowing the charitable foundation and naming their heirs as its head, allowing them to collect lavish salaries as long as 1% or so of the income goes to other scam foundations, the foundation death spiral.

[badtoworse]

7. Sounds like a trust is the way to go

Call me a reactionary, but I've paid taxes on my estate already. The government shouldn't get a second bite at the apple.

[Warpy]

10. Well, you're dead, you're paying no taxes

The unearned windfall your heirs will get is what is taxed. They're the ones who need to file the paperwork and they're the ones who will owe the taxes if you're an offline multi millionaire.

Saying the deceased pays double taxes on what s/he has saved is a Republican lie. It's just not true. Heirs have to pay taxes on inheritances above a certain dollar amount and that's a good thing. Estate planning also considers charitable donations for people who don't want Johnny and Susie to have to pay any nasty taxes on their windfall.

If you buy the Republican lie, OK, you're a reactionary. However, it's just not how that tax works.

[badtoworse]

12. I understand all that.

I don't like the idea of my heirs having to pay taxes on what I've already been taxed on.

[Fantastic Anarchist]

14. If they use infrustracture ...

... Then they should still pay taxes on that inheritance.

Otherwise, the rest of us are just paying for them to live lavishly.

[badtoworse]

16. They're already paying their own taxes, so they're covering their share.

I've already paid for my share.

[whatthehey]

18. and when your money becomes their (unearned) money

they need to pay their share of it too.

I pay my mechanic with after tax money. Should he not be taxed on it when it becomes his? Why should he pay taxes on earned transfer of wealth and your heirs not do the same on unearned transfer?

[A HERETIC I AM]

20. Excellent point!

I pay my mechanic with after tax money. Should he not be taxed on it when it becomes his?

Spot on!

Welcome to DU.

[badtoworse]

22. Earned income is one thing, estate tax is a different matter.

I just don't believe in estate taxes.

[Fantastic Anarchist]

30. Are you planning on passing 5.25 million to your heirs?

Are you in the 0.3% that would be affected?

If not, don't worry about it then.

Your heirs will be able to leech off society with impunity.

[badtoworse]

32. My heirs should be well taken care of.

ETA: All three are responsible young adults with good careers in progress. One is an RN and two are in financial services - they do quite well.

Your use of the term leeches says much about you

[Fantastic Anarchist]

45. And that you don't want to give back to society which made it possible for you ...

... to accrue such wealth says much about you.

As for me, I stand to get quite close to the exclusion mark (probably over by the time I get it). I'm totally happy to pay the tax to give back to the society that made that wealth possible in the first place.

[badtoworse]

50. I give back plenty already. There is a point at which you've given back enough.

We'll have to disagree about where that point should be.

[whatthehey]

53. And your heirs need to give back enough too, especially enough of unearned income.

I pay enough income taxes to lift at least two families out of poverty. I wish I paid enough to do so for 10. 100. 10000. Because anybody who complains about income taxes has one easy way to solve that. Get less income. When the very highest tax rate is under 40% (heck let's add state and FICA and make it 55, ignoring deductions too) , this point of which you speak is only ever going to be hypothetical for any sensible American.

[badtoworse]

56. I pay at least a couple of families worth in income tax and have for quite a while.

I give a lot to charity as well. Saying I'm giving back plenty is not complaining; it's a statement of fact. My heirs pay plenty in income taxes also, so they're giving back their share. I'm very comfortable that we are all giving back. The government doesn't need a piece of my estate to get a fair share - they've already gotten that.

[PowerToThePeople]

54. Financial sevices are a leech

Anyone working in the financial services has contributed zero to human society via their profession. Their whole existence is one of leeching from people who do contribute to society.

I have read your posts in this thread and others and I have an honest question for you. What brings you to a message board that states the following:

Our Community Standards

It is the responsibility of all DU members to participate on our discussion forums in a manner that promotes a positive atmosphere and encourages good discussions among a diverse community of people holding a broad range of center-to-left viewpoints. Members should refrain from posting messages on DU that are disruptive, hurtful, rude, insensitive, over-the-top, or otherwise inappropriate. These broad community standards of behavior are maintained through the combined efforts of members posting and serving on citizen juries, using their own best judgment to decide what behavior is appropriate and what is not.

I may have missed something in your post history (if I have I'll be happy to pull back my question), but I personally do not see evidence of center-to-left viewpoints in what I have read.

[badtoworse]

57. I think those same standards call for civil discourse.

Starting your post with insults doesn't meet that standard. I'm not going to dignify your post any further.

[PowerToThePeople]

59. No insults at all. Just truth. n/t

[whatthehey]

52. Yes earned income is one thing. UNearned is indeed another

WHY do you believe unearned income should be taxed less than earned income? If anything, wouldn't taxing it more be more in keeping with concern for the less privileged?

I have a suggestion that may help frame away this red herring.

Let's repeal estate taxes entirely.

.....and replace them with inheritance taxes, payable on the tax returns of those who receive the money.

No more double taxation, which is of course the genuine moral principle involved, right, not greed and the perpetuation of an overclass?

[badtoworse]

55. I oppose estate taxes on principle.

Calling it something else and making it more onerous for the heirs isn't going to change my opinion. The earned vs unearned income aspect is irrelevant as far as I'm concerned.

[gratuitous]

15. All right; we have your vote

And as long as we're still in a democracy, what say the rest of ye? Majority rules, after all.

[badtoworse]

17. Rest assured, whatever they pay will be the minimum possible.

[MO_Moderate]

43. Amen

zero would be perfect.

[Fantastic Anarchist]

46. They won't pay anything unless it's over 5.25 million dollars.

Anything above that would be taxed at 19% and only for the amount above the exclusion.

The construction worker who's barely getting by will still pay his 35%, though, you just rest assured!

[hfojvt]

37. but you have NOT already been taxed on it

Not always.

Let's say I have 10,000 shares of stock that I bought in 2008 for $20 a share. Now it is 2019 and I am dead. The stock is worth $35 a share. There's $150,000 in capital gains that I never paid taxes on.

Or for a real life example, I bought 4.5 acres of land in 1987 for $4,500. In 2009, I sold it for a net of $20,000. (As it turned out, thanks to the Bush tax cuts, I paid no taxes on that gain anyway.) But if the sale had happened after my death, a good part of that estate would have never been taxed.

And you may say, "aha" (or maybe, like a Heffalump, you'd say "ho ho!&quot but part of that money HAS been taxed.

Yes, and a big part of that money will not be subject to the estate tax. Remember the exemption?

But I always say it's cool. If rich people don't want to pay taxes on their estates after they are dead, then we can just tax them NOW while they are alive. The choice is theirs. Now if it was me, I'd rather pay after I am dead.

[badtoworse]

38. I don't have a problem with capital gains tax

[hfojvt]

39. but the capital gain is NOT taxed

my nephew inherits 10,000 shares at $35 a share. Goes out on a drunken binge and sells it a month later for $34.5 a share.

Is he gonna pay a capital gain based on the original purchase price? Why? It was worth $35 a share when he GOT it. Same with the real estate. Any value it has gained, has NOT already been taxed.

[badtoworse]

40. Let him inherit the basis.

He pays capital gains or writes off losses when he sells.

[IphengeniaBlumgarten]

25. And some of the deceased property has never been taxed...

Consider property (real estate, stocks, etc) that is part of the estate. These things tend to appreciate in value, sometimes quite a lot.

This increase in value is not taxed until the property is sold, then the owner is taxed at the favorable capital gains rates.

However, if the property is not sold by the owner but remains in his estate it goes to his/her heirs at its value at the time of his death.

This the increase in value is NEVER taxed!

[Warpy]

28. Well, it is if it goes over the total untaxed dollar amount

I know I had to supply them with copies of the bill of sale for my dad's house to be added to the value of the portfolio.

[IphengeniaBlumgarten]

29. OK, agreed

I guess this is of greatest benefit to estates that don't exceed the exclusion amount.

But that increase in value is only taxed ONCE at most. Not the double taxation that the Republicans are so eager to talk about.

[mainer]

24. OK, we have a trust. It doesn't really protect heirs from taxes.

It only means that when a married couple dies, the estate gets taxed as if the parents had two separate estates, so it allows an exemption for each member of the couple.

Above that, there are still taxes to be paid.

The only way to transfer money to your offspring tax-free is to give them the maximum allowable gift each year, but that's limited right now to about $13,000 a year.

[House of Roberts]

4. The really wealthy launder their money to their offspring

in ways in takes a tax lawyer to understand. By the time they pass, the amount subject to the estate tax is negligible. Only in cases of unexpected, premature death do these laws apply.

[A HERETIC I AM]

21. Do you have any examples of this?

Or is it just an anecdote on your part? Something you figure must be true.

[pipoman]

31. A lot of people whose estate would be subject to

Taxation buy life insurance to cover the estate taxes. My dad sold those policies for years...

[mainer]

33. If the life insurance premiums were paid by the deceased

then that pay-out is part of the estate, I believe, and would be taxed.

The only way for the heirs to benefit fully from an insurance payout is if THEY paid the premiums through the years. One way parents can do that for their kids is to "gift" the premium amount to their children every year.

But again, that gift is limited to $13,000 per child.

[pipoman]

44. As i remember there was a minimum estate value before it made sense. .

Then they would determine the tax, the policy size to cover the taxes for the heirs. A lot of big farmers did it as I recall. He worked with a cpa....i think the cpa approached him and would contact him with clients who he had advised.


This was 30 years ago. ..I'm sure things have changed. ..

[Gormy Cuss]

48. It's 14K per year per child now.

It's an easy way to transfer assets. Most people I've known who wring their hands about the estate tax don't even know that they can gift so much to their kids, and most of the rest don't want to transfer the assets until death.

[mainer]

49. Right, I'm behind a year!

My kids work hard (one's a teacher, the other's a farmer) and I'm glad I can help them out while I'm still alive and kicking.

[SheilaT]

6. First of all, money gets taxed multiple times

as it moves through the economy: income taxes, sales taxes, school taxes, and so on and so forth.

I honestly think one reason very rich people fight so very hard against estate taxes is that once that tax kicks in, it's very high. Of course, it does provide a great deal of employment for tax lawyers. It's my opinion that estate taxes should kick in at about a $1million point, but not go immediately to 46%, or whatever it actually is. I'd say start at about 15%, escalate to 25% at $10million, and maybe top out at 35% above $25million.

The up side of estate taxes is that it does tend to encourage the wealthy to give money away, and not just to their children or grandchildren.

[PowerToThePeople]

8. I do not know why Republicans are against estate taxes

They should be happy that their heirs get to inherit a pair of bootstraps. What more does any good Republican or Libertarian need to be successful?

Oh I see, that line is just a bunch of bullshit. They really do not have any understanding of what real work is.

[Scuba]

9. My argument is simpler: I don't care if Paris Hilton inherits enough money to live in splendor ....

... for 1,000 years.

But I resent the idea that she would inherit her family's entire fortune while the maids who cleaned all those hotel rooms are living in poverty and dying without healthcare.

[Warpy]

11. Absolutely. After the last 40 years of governments hostile to working people

we need a change and "business as usual" Democrats are going to find themselves losing consistently.

[Gothmog]

13. This tax only affects the larger estates

[eallen]

19. It's easier than that. Money isn't taxed. People are taxed.

The person who died is gone, and will never pay a cent of further tax.

He is not his heirs, who are their own individuals, and who enjoy a windfall by virtue of that inheritance. Why should such windfall be taxed less than the income earned by someone who works hard for their wage?

Well... there is good argument that a spouse is a partner in income and spending, and should have benefit of any joint estate, without paying further tax. And so it is. But after that, who?

[TexasBushwhacker]

23. Not to mention, it's not the governments responsibility to set up dynasties

Wasn't one of the biggest founding principles of our country was that we would not have royalty? Well what is royalty if it isn't being able to pass enormous sums of wealth, generation to generation, untaxed? At the end of the day, these heirs end up far better off than other working stiffs. Besides, if their parents have any sense, they will set up their estate to minimize taxes.

[Turbineguy]

26. You buy insurance for that tax.

That's the answer to give them.

It's not that difficult for a farm or business to be valued above the 5.25 million limit. But that's how you get around the tax problem.

[mainer]

36. As I mentioned above, life insurance payouts are part of the estate

and thus taxable -- if the deceased was the one paying the premiums.

Your heirs have to pay the premiums (and thus own the policy) in order for them to get the payout on your estate tax free.

So if you want your kids to have money tax-free, you tell them to start paying your life insurance premiums now. And trust me, as you get older and those premiums increase to huge amounts (I cancelled my life insurance when the yearly premiums suddenly jumped to five figures) this is not a cheap way to inherit money.

[mainer]

41. Here's the rebuttal to your "solution"

Last edited Tue Mar 25, 2014, 12:09 PM - Edit history (1)

http://www.bankrate.com/finance/taxes/taxes-on-insurance-benefits.aspx

Life insurance

Federal estate taxes must be paid on life insurance benefits above $5.25 million in 2013, but only if the policy was owned by the deceased individual, says Tignanelli.

"If a life insurance policy is owned by the beneficiaries, they won't have to pay an estate tax," he says.

So have your beneficiaries pay the premiums and own the policy. They'll get a tax-free payout. But this solution is not free, and as the insured person gets older, it certainly isn't cheap.

I'm 60 and healthy, and the premium quoted for my term life insurance suddenly shot up to #23,000 this year. I cancelled it.

To get that payout, your beneficiaries would have to pay premiums year after year during your lifetime. If a term policy costs $23,000 a year at age 60 (the number quoted to me), and the parent lives till 80, your heirs would be paying $500,000 over 20 years in premiums -- for what amounts to about a million dollar payout. They'd be better off investing that money in something on their own.

[Turbineguy]

42. My idea was based on not dumping a business or farm in order to pay taxes.

If you have more than $5.25 million in a single illiquid asset, it's a problem.

[gulliver]

27. They should just change the rules of baseball, football, and basketball.

Teams should be able to keep their points between games.

[n2doc]

34. I wasn't aware that Bill Gates had paid income tax on his 50 billion already.

silly me. The mistake these idiots make is in thinking that the super rich made their money the same way that ordinary people do.

[JNelson6563]

35. Excellent post, thanks for sharing this!

[Fantastic Anarchist]

47. You bet!

Glad I can share a little so we can refute the nonsense.

[Frustratedlady]

51. Money hidden on various foreign islands/countries hasn't been taxed.

Even Big Daddy didn't pay taxes on it. Let Susie/Sonny pay the tax.

[Bigmack]

58. I was reading the OP...

... when it suddenly came to me.

"This is a reasonable, researched argument..I love it!"

Then I remembered that the people who most need to read it won't. If they could read it, that is.

The number of Murikans who blindly follow the Fox/Limbaugh "death tax" meme is enormous.

And they're not reading reasonable, researched arguments about any of the heavy-duty questions of the day.

[Fantastic Anarchist]

60. Yes, unfortunately, that is part of the problem.

And we let them frame the debate.