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Monday, April 22, 2024

A good year to die

All those of you who have large accumulations of wealth can die this year.  Well, what I mean is if you do happen to die, there won't be any federal estate tax liability.  That is right, no "death tax" at all.


All those of you who have large accumulations of wealth can die this year.  Well, what I mean is if you do happen to die, there won’t be any federal estate tax liability.  That is right, no “death tax” at all.

As part of the 2001 tax act, Congress increased the amount persons were permitted to give away tax-free at death (the “Exemption Amount”), with the increases phased in over a ten year period. The Exemption Amount increased over the years, reaching $3,500,000 in 2009 and ultimately became unlimited this year. However, because the votes of 60 Senators could not be obtained back in 2001, the tax law changes were limited to a duration of 10 years, meaning that in 2011, the estate tax will be reinstated with an Exemption Amount of only $1,000,000 and a rate of tax equal to 55%, the exemption and rate of tax that were in effect before the 2001 tax act was passed. Certain larger estates will be subject to an extra 5% surtax that was repealed altogether in 2001, but which will also be reinstated in 2011.

As an estate planning attorney, this is wreaking havoc on how I advise clients about how to plan for passing wealth to their heirs.  For those individuals with sufficient wealth, it makes planning extremely complex.

Other major changes this year apply to capital gains and gift taxes.  Property passed on death no longer receives a step up in basis to the value at the date of death.  This could result in significant additional capital gains taxes upon the sale of inherited property. Gift taxes, on the other hand have been reduced from 45% to 35% over the exemption amount.

Some oppose any “death tax” at all.  They argue that it penalizes hard work and ambition. Some argue against a tax on estates of small busineses or family farms becuase often a tax on those estates requires that the business or farm be sold to pay them.

The House has passed and sent to the Senate a bill that would remedy most of these problems and continue the estate tax largely as it was last year.  That means an exemption for estates of less than $3.5 million.  The House bill also would exempt many small businesses and family farms. The Sentate has failed to act on this or its own legislative proposals, leaving the law muddled and uncertain.

The argument against any estate tax seems to me to be bogus. It is harmful to society for wealth to accumulate and pass from generation to generation.  It creates an elitist class that tends to dominate the culture, not always for the better. I can somewhat agree with an exemption for small business and family farms. It would be disruptive for them to be sold upon the death of the principal owner.

Yet every estate attorney recommends to such people that they purchase relatively inexpensive insurance to pay for any taxes, so it seems to me this argument is not based upon reality but rather a political bias toward wealth.

As for other wealthy individuals, there are a number of ways to minimize the impact of the tax, not the least of which is to give some portion to a charity, thereby enriching the entire community. But at basis this is a controversy about how you think wealth is generated. Those who argue that individual effort is the foundation for wealth create live in an illusion.

The top income earners in America are largely now those who produce nothing but entries in a ledger and then move them around, or actually, have others do that upon their command.  These are the very people who have caused so much damage and heartache for those of us below their lofty status. There is no advantage to society to reward this phenomenon. It is rather a cancer in our midst.

This subject is yet another part of our culture wars, and I am quite sure that the Congress will get around to passing yet another “reform” bill this year. The House bill has some good points, but in my view fails to address the real harm resulting from genrational wealth accumulation.

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