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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