Question about estate tax

[garybeck]

Maybe this is a dumb question, but I need to ask it...

Supposedly the money in your estate has already been taxed. If it was income, you paid income tax in the year you made the money. If it was capital gains from investments, you paid it back then also. Retirement accounts... my understanding is you pay tax on that too, at some point, either when you put it in or when you take it out. Perhaps there are other ways people make money but those I think these are the main three, and I would think that the money in most estates has come mostly from these sources and has already been taxed.

so my obvious question is, isn't an estate tax essentially a tax on money that has already been taxed? Isn't that double taxation?

Now, I'm a lefty liberal progressive that wants higher taxes on the rich. So don't get me wrong. But the idea of taxing money that has already been taxed kind of bothers me. I'd rather see a higher income tax rate for the rich and if they save their money once it has already been taxed once, it should be theirs to keep.

Am I missing something? Am I wrong?

[GodlessBiker]

1. Many things are double taxed. Corporate profits are taxed at the corporate ...

level and then taxed again as income to you when you receive those profits as a dividend.

A couple of the primary purposes of the estate tax are to resist the inclination to form robber baron family dynasties through inherited wealth and to encourage donations to charity, since those funds are not taxed.

[garybeck]

4. OK my tongue is half in my cheek but...

isn't that the american dream... to "form robber baron family dynasties through inherited wealth?"

I mean, I feel like one of the "values" my parents passed on to me is that I'm supposed to work hard, and save up money so that I can pass it on to my kids and they can live an equal or better life than me.

[GodlessBiker]

8. I don't think that's the "American Dream." The "American Dream" is to ...

get married, have kids, be able to afford a nice place to live as you watch your kids grow up, retire after your kids are grown on a reasonably comfortable income so as not to be a burden on your kids; things like that. The whole white picket fence thing.

I don't think most people would think that their dreams were shattered or unfulfilled if they didn't turn out to be John D. Rockefeller or Cornelius Vanderbilt.

[lumberjack_jeff]

39. If you started with less than $3.5 million, then they still can.

[gmoney]

26. Not quite

If a corporation earns profit, but turns around and pays it out as dividends or bonuses, the corporation does NOT pay corporate income tax on it, because it's a deductible business expense. This is one reason corporations large and small are cited as paying "no Federal Income Tax." The dividends or bonuses are taxed at their respective rates and the recipient is responsible for those taxes.

[GodlessBiker]

32. Really? A don't think a dividend to a stockholder is a deductible business expense to the ...

corporation. Salaries and bonuses to employees, yes; but not dividends to shareholders.

See down toward the middle of the page:

http://www.nolo.com/legal-encyclopedia/article-30157.html

[gmoney]

44. my bad...

thanks for the heads up.

[SDuderstadt]

2. Simple question...

What's the current tax for capital gains? Now, compare that to federal income tax. Any questions?

[badtoworse]

5. By your reasoning then, if the estate was accumulated in years...

when marginal rates were high (e.g. the 50's), they should free of taxes.

[Name removed]

28. Deleted message

Message removed by moderator. Click here to review the message board rules.

[badtoworse]

29. Maybe you should explain why the capital gains tax is relevant

[SDuderstadt]

31. You've got to be...

kidding, dude.

[badtoworse]

33. The OP was about the justification of applying the estate tax ...

...to assets that had already been taxed. The OP asked whether that was double taxation and by extension, whether it is fair. Your post about capital gains tax rate vs. the federal income tax rate seemed irrelevant to me and it still does.

If you have a point to make, why don't you make it.

[SDuderstadt]

34. I already made my point...

your post # 5 was a stupid strawman argument.

[badtoworse]

35. I guess you did. Too bad it had no relevance.

[SDuderstadt]

36. No one cares whether you think...

it had relevance or not, dude.

[lumberjack_jeff]

41. Because no one accumulates $3 or $4 million from paychecks. n/t

[badtoworse]

42. Some people accumulate much more than that from paychecks,

but that goes to a different fairness issue - the disparity between executive pay and what the least paid people in an organization get. The split needs to be changed to spread the money around more evenly

Over the years, both the capital gains tax rate and the tax rates on ordinary income have varied greatly. Currently, the capital gains tax rate is lower than the higher marginal rates, but that has not always been true. If it's fair to tax the money twice, then the rate it was taxed the first time shouldn't matter. If it does, then explain it to me.

[lumberjack_jeff]

43. Because government must provide services, and the wealthy have all the money.

Fuck "fairness".

They have the money, we have the torches and pitchforks.

Heirs don't have a superior moral right to tax-free inheritance than wage earners have to tax-free salaries.

Fuck 'em. That's why.

[Big Blue Marble]

3. First there is no unspoken rule about double taxation

being undesirable. Much of our income is taxed and then taxed again. Consider sales taxes.

Secondly, often great accumulations of wealth go untaxed during the accumulation phase. Capital gains are not taxed
until the asset is transferred through a sale. So much of the holdings of the rich have not been taxed. Under current
estate tax law, any of these assets transferred to the beneficiaries will transfer at their current value, so when sold
any gains accumulated during the life of deceased will never be taxed unless an estate tax is assessed.

[garybeck]

6. well I can see that as an issue but

couldn't they resolve it by saying the recipients have to pay capital gains tax on investments that are in the estate (if they are liquidated), rather than a flat estate tax?

[Big Blue Marble]

13. Absolutely.

Of course the rich would not like that either. But capital gains taxes are calculated a much lower rates than
inheritance taxes, so they might like better. Also they would be able to exercise better timing of the tax event.

One thing I do not like about estate and inheritance tax is it sometimes forces the estate to liquidate assets
to meet the tax obligations without regard to the market environment.

[badtoworse]

7. That, by the way, is a very tax efficient way to donate to charity

If you donate securities directly to a charity, you get to deduct at the fair market value of the security w/o paying capital gains tax on any gains.

[gmoney]

22. this is correct...

It was either Krugman or Daniel Cay Johnston who pointed out that most of Bill Gates' wealth has never been taxed because he's not actually "realized" the capital gains on his Microshaft stock. So, if he outlives his wife, when he dies, that wealth could go to his children, and if estate tax is collected, that would be the only time the money is taxed. And there was talk on here yesterday about so-called "Dynasty Trusts" that let this wealth go untaxed for generations.

[Roselma]

9. you may be missing something:

http://www.cbpp.org/files/estatetaxmyths.pdf

[dflprincess]

10. "once it has already been taxed once, it should be theirs to keep"

except they're dead when the estate tax kicks in and, as the saying goes, they can't take it with them. The people who pay the estate tax are the heirs who have not paid taxes on the money in the past. Do you really have a problem with Paris Hilton having to pay taxes on money she inherits? It could be the only chance she gets to actually contribute to the country.

Think of it as being the dues they pay for being members of the lucky sperm club.

[Johonny]

17. pretty much

[Warren DeMontague]

11. In answer to your question, yes, It is double taxation. Doesn't mean it's inherently wrong

but it certainly is money that is being taxed twice.

I think a few pertinent points regarding the estate tax are worth mentioning; first off, the fit being thrown with regards to it and "the deal" is far outsized compared to the revenue in question- we're giving up far more revenue by cutting yearly income taxes for the people making, say, 7 figures a year. People should look in the mirror and ask themselves if this is really about policy and revenue, or just about the fact that they don't like Paris Hilton.

Secondly, with the old one million exemption, a lot of people with real estate in places like California and New York will find themselves subject to it just on the basis of property values. We're not talking about folks living in Mansions, either. It's pretty damn easy to hit that mark with property in certain markets. I don't think the purpose of the Estate tax is to force folks to sell the family home just to pay the taxes on it.

All that is a reasonable argument for raising the exemption, which is likely to happen. The question is how much and what percentage to tax above that.

[the redcoat]

12. The difference is the people receiving it

In the "first" tax, it's the rich individual getting taxed. When that individual dies, their heirs essentially get free money, so the tax is on that free money of the heirs, not the rich person. If that rich person were alive and bought an item, there would still be sales tax because of the transfer of money. Because money is being transferred from one person to another, consider it like a transaction.

So, this is a shitty answer, but "yes and no."

[Statistical]

14. Yes but here are a couple points.

1) 401K and IRA are almost never a part of your estate. Notice when you created the account you set a beneficiary. On death ownership transfers directly to beneficiary. The account never becomes part of your estate and never is taxed.

2) Same thing applies w/ life insurance policies. They actually are a contract between the beneficiary and the insurance company. The insured persons death is merely the event that causes the payout according to the contract.

3) For married couples (hopefully someday same sex couples too) in most states property is held in joint ownership. So when you die your primary residence transfers to the surviving spouse and never becomes part of your estate. One should check with lawyer as real estate and property laws vary dramatically from one state to another.

4) Many people leave a significant portion of their assets to a charitable organizations at death and they are not part of estate tax.

So lets take a hypothetical situation.

Say at death you have net worth of $10 million plus another $2 million life insurance policy.

$4 million in 401K/IRA and other tax protected accounts.
$2 million in equity in your home.
$4 million taxable assets (stocks bonds, investments, property, art, etc outside tax deferred accounts).

Now lets say you are married and spouse is beneficiary for the accounts and also owns the primary residence jointly.

$2 million cash from life insurance is paid to him/her - no taxes.
$4 million in 401K/IRA is paid to him/her - no taxes.
$2 million residence passes to sole ownership - no taxes.

So your spouse (and/or other beneficiaries) got $6 of $10 million without ever going into your estate. Now of the $4 million taxable estate you leave $1 million in charities (10% of net worth @ death) - no taxes. The remaing $3 million is part of taxable estate. Under Democratic plan $1 mil would be exempt (Rep exempt $5 mil) leaving 2 million you pay taxes on. If that is taxed at 35% your taxes owed will be roughly $1 million.

$12 million left to beneficiaries of your choice and only $1 million paid in taxes effectively an 8.3% "death tax" despite the 35% marginal rate. Now the reality is there are a variety of mechanisms to move that $3 million taxable estate to tax protected assets. One of the simplest is whole life insurance policies (generally a rip but very useful in converting taxable cash into tax shielded "insurance").

[jdlh8894]

19. Smart man!

Especially the life insurance.People do not realize that proceeds from life ins. are not taxable.

[Gormy Cuss]

15. Here's a good description of the myths of estate taxation.

Myth # 4 addresses your question.
http://www.cbpp.org/files/estatetaxmyths.pdf

[pansypoo53219]

16. as if the rich PAY taxes.

this is like the ONLY way to tax the greedy

[DrDan]

18. let's say I purchase $10,000 in stock at $10 per share years ago

upon my death, the share price has gone up to $100 per share. The value of this stock is now $100,000.

I have paid tax on any dividends, but if not sold, no capital gains has ever been paid.

Now upon my death, the "basis" for this stock, that has been passed to my children is $100,000 (the value on the day of my death). If they sell it for that amount, they owe no capital gains. So $90,000 has passed via the estate without being taxed.

[badtoworse]

20. I believe that is correct, but they may owe estate tax...

...if the total value of the estate exceed the exclusion

[DrDan]

23. that is true - but if it is within the $5M, then that money is not taxed

[badtoworse]

24. $5M if the tax cuts are extended...

If they are not, then the exclusion drops to $1M

[DrDan]

25. of course

[lumberjack_jeff]

40. Multiply that by thirty and there's still no estate tax. n/t

[DrDan]

45. it was simply an example of how some money will escape any tax

no estate tax, no capital gains, no income tax - no tax ever paid for the $90,000 of wealth in that example.

I understand the estate tax limit - this simply shows how ALL tax can be avoided on an investment.

[rgbecker]

21. I think it would be a rare bird that is holding more than a half a million in cash.

Even IRA's etc. are usually invested in stock/bond funds and most of the rich are holding some portion in business investments (stocks again). This coupled with the several houses and other real estate holdings and you have the potential for huge untaxed gains. Every increase in the exemption amount passes on these gains untaxed. This besides the obvious point made by others that the dead one isn't paying any taxes, its the estate and the heirs who will inherit less. Remember, it's one percent of those who die whose estate muct pay. By the way, farms account for only .9 billion paid in estate tax in 2009 out of 25 billion collected from all the estates. Compare that to 70 billion per year just handed to those earning over $250,000.

[Commie Pinko Dirtbag]

27. Money is taxed whenever it changes hands. It's called income.

Inheriting money is just another form of income. Wages are another. Dividends are another. Selling your house is another. Winning the lottery is another.

I have the impression that most people who push that fallacious "double taxation" line are aware of that, but hope to convince uninformed people anyway.

But it's plausible you're a part of the minority that does this without malice, so I'll give you the benefit of doubt. But I shouldn't; your phrasing screams "scripted talking point". "Don't get me wrong"? "Now, I'm a lefty liberal progressive... but?" Puh-leeeze.

[karynnj]

30. Consider that the people RECEIVING the money have never been taxed on itCons

Consider these two people

1) This person is living on the edge with a minimum wage job, her first cent is taxed by the payroll tax.

2) This person, a daughter of a wealthy man, had the best education money could buy, and was given a lifestyle from day one that person number one could likely never even imagine. Entering any field, her background gave her the contacts that her peers in college didn't have and the top people would be like everyone she knew growing up.

Now imagine her father died leaving her as the sole heir to over $6 million dollars.

Do you really think it wrong, that she will be taxed on $1 million at 35%. So, rather than getting $6 million, she gets $5.65 million. Do you really think that unfair?

[Bandit]

37. Assets such as Property go up

They don't get taxed until they are sold, except for annual property tax.

[lumberjack_jeff]

38. No. You're not being taxed again. You're dead.

Besides, you say "double taxation" on multimillionaires like it's a bad thing.

[SoCalDem]

46. Your boss is paying you with money he supposedly has paid taxes on, but it's NEW to YOU

Every time cash changes hands, it SHOULD generate a tax..just as the middlemen for products charge a "fee/charge/cost" when they pass the product down the line.

The people amassing huge fortunes have done it largely because our governmental policies have provided a safe/secure/lucrative atmosphere for them.

No one is advocating confiscation of their estate...just taxing the wealth as it passes, unearned to heirs.

the old canard about the "family-farm" is ridiculous too.. First of all, there are very few of them left anyway, and the beef is not about taxes really, but about how to divvie it up..

An intact farm, continuing to operate is NOT what the heirs usually want.. They want THEIR share, and when the farm is broken apart to satisfy multiple heirs, each probably ends up feeling cheated and angry.

There could easily be an offset created for businesses/farms/etc IF they remained intact and continued to operate, but once they are sold off.divided up a tax should be owed...as well as taxes on huge piles of money that has been stashed away for decades...held out of circulation