Billion Dollar Inheritance: Heirs Pay NO Tax – Right or Wrong?

by Darwin on June 14, 2010

There was an interesting new item the other day (here) on a Billionaire that was able to bequeath his entire fortune of 9 Billions dollars to his heirs and they got to keep it all – not one red cent went to the taxpayers.  This is all possible by the “luck” (if you’d call it that) that he died during calendar year 2010.  Since the Bush tax cuts had scaled changes to the inheritance tax threshold across multiple years with 2010 being an infinite amount allowed without taxation “sunset provision”, jokes about about the number of elderly that are going to “mysteriously” pass away this year or the number of plugs pulled on New Year’s Eve this year on breathing machines, etc.  Jokes aside, 2010 is the optimal year to die from an estate planning standpoint.  Since his estate would have been taxed at 45%, that’s $4 Billion that would have gone into federal coffers in the past that won’t this year.  Starting in 2011, the exclusion reverts back to $1 Million again unless new legislation is enacted by then.

Regardless of whether the inheritance was Billions, Millions or barely enough to cover funeral expenses, without considering scale, how about considering the concept of taxing inheritance itself?

Pros and Cons of the Inheritance Tax

  • Caste Systems in the US – Many feel that by allowing families to continue to amass wealth and pass it on generation after generation, there will always be classes of haves and have-nots.  Those in the elite class will always have virtually infinite funds to continue their domination while those borne to ordinary citizens will never have parity with the inheritance class.  This is an extreme view and over-generalized but you get the point.
  • Many point to the impact this tax has on small businesses. If heirs inherit a small business with a sizable estate but little liquid assets, there’s no feasible way to pay the estate tax without liquidating the family business.  This is in some cases an unfortunate side effect.  While some make this claim about family farms as well, there is a provision to address family-owned farms specifically.
  • Double Taxation – Another common argument is that one’s wages, earnings, investment gains, (even a prior inheritance) were already taxed DURING one’s lifetime, and now it’s being taxed again.  That’s true.
  • Loopholes – Like virtually everything in life tied to either legal or financial matters, there are myriad ways to avoid, mitigate or alter the intent of the estate tax.  With crafty estate planning, gifting, actions leading up to death, etc., there is the routine cat and mouse game with the taxman which is probably a net loss to society and heirs and a boon to lawyers and financial planners.  If the code were more clear or devoid of loopholes, perhaps money could be passed more efficiently, to both heirs and taxpayers.
  • You Didn’t Earn It – There’s just something different about earning money versus being given money just because of who you are or what situation you were in.  Earning a $10,000 bonus for hard work just seems more “moral” or appropriate than knowing that you’re being gifted $10,000 by mom every year for the rest of your life, just because mom has some bucks.  It’s akin to being entitled vs. having some skin in the game.  This touches on some of the concepts above.

Where Do I Stand on the Inheritance Tax?

I don’t believe everything in life needs to be a binary decision – like either no tax whatsoever, or tax the heck out of everything over $500K or something along those lines.  While the theory of basically usurping family money and redistributing it to taxpayers sounds unfair, at some point, you’ve gotta admit it becomes rather absurd to pass on Billions upon Billions of dollars to heirs creating generational wealth that seems rather ridiculous.  Consider when Warren Buffett dies (he’s actually in favor of the estate tax), should Billions go to his children untaxed?  Billions?  I think it’s fair to impose a nominal tax on massive fortunes, but with a few provisions.  At the lower levels, it should certainly be indexed to inflation, which pre-Bush was a problem, because the thresholds were relatively low, especially given inflation and home price appreciation.  While I struggle a little bit with a redistribution of wealth earned by a particular family member just because they died, the estate tax is a rather common and accepted practice in other western societies and taxes are needed to fund the country’s needs after all.  Something’s gotta give and since the estate tax has always been (ex-2010) and likely will always be at least some part of the tax system, if trying to abolish it, who pays for the loss in tax revenue?  Where’s that money coming from?  I’ve gotta lean toward being in favor of it, but perhaps with higher limits at the lower end.

Where Are You on the Inheritance Tax?

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Weekend Reading – Apologizing for Apologizing to BP Edition
June 17, 2010 at 11:05 pm


1 20smoney June 15, 2010 at 9:17 am

The death tax is about the worst thing imaginable from my point of view. Absolutely ridiculous that you pay taxes on everything you earn throughout your life, then get taxed again on what’s left over when you die. Ridiculous.

2 Budgeting in the Fun Stuff June 15, 2010 at 4:09 pm

I also can’t see ths tax as being fair at all. It should be up to me what to do with my money after the appropriate taxes have been paid. It doesn’t seem fair at all for the government to get nearly half just because I died. I don’t think this tax will effect me, but it doesn’t seem right.

In regard to where to make up this money, I would really appreciate it if goverments had to run as efficiently as I do. They’d save a ton if they stopped wasting resources on bureaucratic nonsense. When the fat is trimmed, I bet we don’t need as much to run the country as we thought.

3 Make Cash Now June 16, 2010 at 2:19 am

Taking peoples hard earned money is terrible. The government should not be able to take peoples money when they die. If they want to pass it on to their heirs that is their business and they shouldn’t be taxed either. But I guess that is why they have life insurance policies that can get around taxation.

4 Darwin's Finance June 16, 2010 at 11:22 pm

Lots of opposition here. And I’m usually the one saying “hands off my money!”. I can’t disagree with the concept of keeping family money in the family…but doesn’t it get a bit ridiculous when it’s tens and hundreds of millions of dollars in hoarded money through the generations? Since it’s a tax that’s always been there and other developed nations have it, would it be prudent to just cut it? Many of the richest Americans actually believe in it and/or have just recently pledged to give away 50% of their wealth to philanthropic causes! When it’s an obscene amount of money, I start to think differently about it.

5 Evan June 17, 2010 at 12:07 am

I spend 93% of my work day planning for Estate Taxes (for others not me!).

I go back and forth on the topic. On the one hand I HATE taxes and find that the pros above and justifications usually given don’t truly justify the tax. On the other hand, it literally affects the top 1% (may be 3 to 5% if it resets in 2011).

6 Ryan June 19, 2010 at 10:32 pm

I look at the estate tax a bit differently. If this billionaire had died during the Clinton administration, I’d feel a bit better about the tax. But dying during the Obama administration or if he had died during the Bush administration, well, isn’t that like giving a drunk a drink? My impression is that this man’s heirs will be far more constructive with the money.

jake Reply:

@Ryan, Obama hasn’t spent anything. All the debt build up under Obama came from the Bush tax cuts, Bush wars, and the Bush Recession. Nice try.

7 James Bowen June 28, 2010 at 12:04 am

All income should be taxed the same as wages and salaries including inheritance income.

8 jake December 5, 2011 at 1:10 am

The estate tax is not a double tax. Those inheriting an estate are taxed once. You can’t tax a dead person. This is a common mistake, but it is an otherwise good article.

Another argument against lower estate taxes is that those who do real work for a living will end up having ht tax burden shifted onto them. I don’t see a reason why I should have to work 60 hours a week and pay a higher tax rate than Warren Buffet just so Paris Hilton can inherit 400 million instead of 200 million.

James Reply:

@jake, That’s if you attach the tax to the person. If you attach the tax to the money, it’s double. I agree that the obscene amounts should be taxed if it’s liquid. If it’s not liquid, tax it when the heir cashes out. I’m not sure how easy to track that though.

9 chiyo March 5, 2015 at 10:07 am

I’ve paid taxes on used cars (which were already sale’s taxed during the initial purchase, and any subsequent sales) with money that has been used pay more sales tax on other purchases , from money that was income taxed. Does that make my money triple taxed? I’m totally confused.

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