New York Trusts & Estates Law Blog » Estate Tax

Richard Epstein on the estate tax

Saul Elnadav — Wed, 10 Mar 2010 20:01:51 +0000

Richard Epstein, responding to Paul Krugman’s Op-Ed in the New York Times, defends the Republic position on unemployment benefits, the estate tax and health care. With regard to the estate tax he writes:

So let’s start with the estate tax and ask whether a tax that exempts 99.75%, of all estates, as the Democrats propose, is better than one that just abolishes the tax altogether. I vote for the latter. The estate tax operates as the third tax on the accumulation of wealth–after progressive taxes on earnings and savings. That heavy state and federal key drives many people to take grotesque steps to minimize their liabilities, which in part explains why only 0.25% of the people pay it. By forcing these dumb maneuvers, the tax distorts the accumulation and transfer of capital in ways that could easily reduce the production of wealth that could be subject to an income tax. Only if you think that hitting the most productive portions of the population is the right way to instill a sense of national unity would you want to keep this ship afloat.

The full article can be read here.

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Will Congress’ inaction on the estate tax cause more deaths in 2010?

Saul Elnadav — Mon, 11 Jan 2010 16:43:15 +0000

Paul L. Caron, the TaxProf blogger, provided the following chart from a 2006 article by Joshua S. Gans and Andrew Leigh, “Toying with Death and Taxes: Some Lessons from Down Under”. The chart purports to show that a significant number of the deaths in Australia were shifted from the week before to the week after July 1, 1979, the date on which the estate tax was abolished in Australia.

I haven’t read the article by Gans and Leigh, and statistics and interpreting raw data are not my areas of expertise. I was initially perplexed by the increase in the number of deaths between June 28 and June 30. However, John Gordon (transactional / real estate) and I, pooling our respective undergraduate backgrounds in philosophy and literature, concluded that many people who had been placed on life support earlier in the week had been long shots for survival. Some may have lived a few days longer, but much to their desperate family’s chagrin, didn’t quite make it to July 1.

Granted, that may be cynical and far-fetched. But see this article in the New York Post on January 11, 2010, which reported on two people whose estates will be taxed because they died several hours before the 2010 repeal.

But [the] dilemma tormented another New York family whose wealthy mother was terminally ill in December.

“The family could have put her on aggressive, artificial life support, with tubes and medical devices, until January 1, thereby saving $3 million in federal estate taxes,” a source said. “The family chose the kinder path — letting her die naturally and peacefully.” She didn’t make it to New Year’s Day.

Just to put that in perspective: As of right now, there is no federal estate tax for people who have died in 2010. Congress may still act to reinstate the tax retroactive to January 1, 2010, and several members of Congress have indicated that they intend to do so.

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House to vote on estate tax amendment

Saul Elnadav — Thu, 03 Dec 2009 01:10:52 +0000

According to North Dakota Congressman Earl Pomeroy’s website, the House of Representatives is scheduled to vote on H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 on Thursday, December 3, 2009. The bill proposes to freeze the estate tax exclusion at $3.5 million with a maximum tax rates of 45%.

As noted in earlier posts, current law repeals the estate tax for 2010 and reinstates it for 2011, with an exemption of only $1 million and a maximum rate of 55%.

As with so many budgetary issues, depending on what you compare it to, you can spin it as a tax increase or, more logically, as an overall tax cut. Compared to current law, it’s an increase for 2010 and a cut for 2011 and beyond.

In case you’re wondering, the farm picture is courtesy of Congressman Pomeroy’s website.

Update 12/4/09: The House passed the bill 225-200. See House Votes to Extend Tax on Estates of the Wealthy, NYT 12/3/09, which notes that the bill might be delayed in the Senate, but that “lawmakers do not want to delay action until next year because they are wary of enacting retroactive tax changes.”

Warren Buffett and Bill Gates on the estate tax

Saul Elnadav — Mon, 18 May 2009 14:43:00 +0000

I just came across a interview of Warren Buffett and Bill Gates which I thought was relevant to our earlier discussions of wealth, luck and whether the wealthy should complain less about their share of the tax burden. (I say “discussion” because, yes, I did get some of you to comment. And no, I didn’t pay anyone to comment.)

In the interview with Liz Claman of Fox Business News on May 4, both Buffett and Gates say they are in favor of the estate tax. They make a pragmatic point similar to the one Robert Frank of the Wall Street Journal made in passing – the estate tax raises significant revenue. If we repeal the estate tax, how will we replace the lost revenue?

Buffett also does the following calculation. Approximately 2,450,000 people in America will die in 2009, but only about 12,000 federal estate tax returns will be filed, which means that only 1 in 200 people leaves a taxable estate. If you went to a funeral every month, says Buffett, it could take 17 years to attend the funeral of someone whose estate will be federally taxed. I haven’t checked his numbers, but his point is that if we repeal the tax on 1/200th of the population, we’d have to shift the tax burden downward to everyone else.

Gates then says that people with very rich estates, himself and Buffett included, have benefitted from the rules and stability of this country. If they had to choose where to be born, they would choose the U.S., even if that meant paying the estate tax.

According to a blog post by Edward Zelinsky, a law professor at Cardozo, Warren Buffett has made the same argument in the past:

Among his other observations, Buffett has correctly noted the dangers to a democracy of inherited wealth as well as the moral obligation of those who have done particularly well in American society to give back to that society. As Buffett observed, he would not be Warren Buffett if he had been born in Bangladesh.

These concerns have led Buffett to support retention of the federal estate tax and to express dismay that his federal income tax bracket is lower than his secretary’s.

Which seems very civic minded indeed, except that, as Zelinsky notes, Buffett and Gates appear to have planned their estates around charitable giving to avoid paying federal estate tax.

Zelinsky writes:

Buffett (and Gates) might explain this apparent contradiction by arguing that their charity is an effective substitute for taxation. Thus, the argument would go, when they give $1.00 to the Gates Foundation with no corresponding tax payment, they should nevertheless be treated as if they had paid $1.00 in tax since the contributed $1.00 is devoted to public purposes.***

[But] giving money to the Gates Foundation is not the same as giving money to the federal Treasury. The federal Treasury is controlled by the people of the United States through their elected representatives. The Bill and Melinda Gates Foundation is controlled by Bill and Melinda Gates.

Zelinsky urges Buffett to put “his money where his heart is” and give charity to the Gates Foundation on a taxable basis. The logic escapes me. If Buffett really believes that the best place for his money was the federal government, he should donate it all to the Treasury and encourage Bill Gates to do the same. After all, Buffett’s estimated $37 billion is 2% of the projected $1.84 trillion federal budget deficit for 2009.

It seems to me that Buffett’s actions imply a clear distrust of governmental taxing and spending programs and their ability to improve society in an efficient manner. As we’ve said, the argument that one has a moral obligation to society for the opportunity to acquire wealth does not necessarily lead to an endorsement of government tax and spend policies. Philanthropy has a long history of improving society. Warren Buffett obviously trusts the Gates Foundation more than he trusts the Treasury to use his money wisely for the public good.

On the other hand, perhaps people who have attained a certain level of wealth stop making sense and maybe I should stop trying to figure them out. At the beginning of the clip Warren Buffett says that the income tax charitable deduction is “peanuts” to him, and he isn’t at all effected by the Obama proposal to reduce the deduction. By the end of the clip, he and Bill Gates are talking about the piles of coupons they used at McDonald’s in China. I’m sure they had a blast.

Hard work and dumb luck

Saul Elnadav — Mon, 04 May 2009 22:24:00 +0000

My recent post, Tough luck for dumb luck, linked an article by Robert H. Frank which disagreed with the contentions that the tax system strains the vital connection between individual effort and reward. Robert H. Frank argued that luck contributed heavily to success, and that “well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.”

Following an interview on Fox Business News, Robert H. Frank clarified his position this way in a Huffington Post column:

There’s no question that hard work and talent make someone more likely to achieve economic success. But for every successful person who exhibits these qualities, there are hundreds of others who are just as talented and work just as hard, yet earn only modest incomes.

Even talent and the inclination to work hard are themselves heavily dependent on chance. In combination, genes and environment ultimately account for all important individual differences, which means that someone who was born talented and brought up to be hard-working was incredibly lucky to begin with.

The Wall Street Journal journalist and author of the Wealth Report, Robert Frank (apparently no relation) appeared on Fox Business News the following day in this video:

Near the end of the clip, WSJ’s Robert Frank makes the common sense point that the discussion of luck and success is all very nice and academic, but misses the most important thing about tax policy in the current economic environment. Congress and the Obama Administration need to raise money to fund the stimulus, and the wealthy are who have it. An honest debate about tax policy should focus less on philosophy and more on what, if anything, government needs to do.

This essentially was my point when I wrote that Robert H. Frank’s point that luck plays a big role, even if true, “doesn’t necessarily lead to the belief that governmental taxing and spending is fiscally sound or that it creates the circumstances for economic and social progress.”

However, in a follow-up blog post on the Wealth Report, WSJ’s Robert Frank wrote that:

practically all of the millionaires or billionaires I have interviewed over the years were obsessive workers. Sure, people win the lottery. And some inherit their money. But they are the minority. Repeated studies show that inherited wealth accounts for 10% to 20% of today’s multimillionaires.

That isn’t to say that luck doesn’t play a role in getting rich. In a study by PNC Wealth Management of 1,500 Americans with $500,000 or more in investible assets, 37% of self-made wealthy agreed that “the money I have made so far has come from being at the right place at the right time.

One Robert Frank writes for the Wall Street Journal. The other Robert Frank writes for the New York Times and teaches economics at Cornell. They’re talking past each other, but seem to agree more than disagree that hard work leads to success if you’re lucky. Both Robert Franks focus on whether and to what extent the wealthy should congratulate themselves or all of us for their wealth, but miss the crucial questions of whether governmental taxing and spending is fiscally sound and whether it’s the right step to creating the circumstances for economic and social progress.

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Tough luck for dumb luck

Saul Elnadav — Wed, 29 Apr 2009 03:27:00 +0000

I previously linked several editorials arguing for and against the estate tax. A frequent argument in favor of lower taxes, heard again at the recent anti-tax tea parties, is that taxing income and wealth strains the relationship between effort and reward. Higher taxes are a disincentive to working hard.

The New York Times recently published an article arguing that such arguments rely on the false assumption that that there is a clear connection between effort and financial wealth. See Before Tea, Thank Your Lucky Stars, Robert H. Frank, New York Times, 4/25/09.

Excerpts from article:

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. * * * Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.

* * *

Another important message of recent research is that a person’s salary depends far more on where she is born than on her talent and effort. * * * Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

* * *

[W]hen government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners.

Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they’d hit a triple.

Read the full article here.

It’s a provocative argument. I suspect, however, that many wealthy people who are committed to philanthropy would agree that luck and circumstances outside their control contribute to their wealth and that, as a result, they are morally obligated to society for their opportunities. However, this doesn’t necessarily lead to the belief that governmental taxing and spending is fiscally sound or that it creates the circumstances for economic and social progress. After all, individual and family philanthropy has a long history of improving society, while the modern tax on income and wealth transfers is a relatively new thing in the United States.

Thoughts, anyone?

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Estate Tax Debate: Recent Editorials

Saul Elnadav — Mon, 06 Apr 2009 17:18:00 +0000

With the estate tax to be repealed at the end of 2009 unless new legislation is passed, the political debate over the economic and moral value of the estate tax is being renewed.

The Senate Finance Committee is considering the Baucus proposal, which I wrote about last week. The House Ways and Means Committee is considering H.R. 436, a bill which would make permanent the $3.5 million exemption and a top tax rate of 45%. An additional tax would be imposed on estates over $10 million to phase out the effects of graduated estate tax rate and the unified credit. In addition, H.R. 436 would limit the availability of the controversial valuation discounts for transfers of minority and/or restricted interests in property.

Last week, the Senate approved a budget amendment that would raise the estate tax exemption from $3.5 million to $5 million, and reduce the tax’s maximum rate from 45% to 35 percent. It approved another amendment blocking that estate tax cut until an equal amount of tax relief was afforded, in aggregate, to people making under $100,000. The budget is not law, so don’t get too excited. It’s hard to see how Congress can cut taxes that much while also increasing spending.

For recent editorials for and against the estate tax, see the following:

Spend It in Vegas or Die Paying Taxes, by Arthur B. Laffer, Wall Street Journal, 4/2/09, arguing that the estate tax is economically inefficient and creates the wrong incentives:

Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that’s just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%.

The Forgotten Rich, New York Times, 4/1/09, arguing that estate tax opponents create wrong impressions of the reach and effect of the estate tax, and that the estate tax creates the right incentives:

The estate tax creates a big incentive for high-end philanthropy, because charitable bequests are exempt. On Tuesday, Independent Sector, a nonpartisan charitable coalition representing thousands of public charities, private foundations and corporate-giving programs, urged the Senate to reject the Lincoln-Kyl amendment and to keep the tax as proposed in the Obama budget.

More Tax Cuts for the Rich?, Washington Post, 4/2/09, arguing that proposals to reduce the estate tax in the current economic environment are “outrageous and nonsensical.”

No surprises, given the sources. I will link more articles as I come across them.

SE

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Estate Tax: The Baucus Proposal

Saul Elnadav — Fri, 03 Apr 2009 18:24:00 +0000

Senate Finance Committee Chairman Max Baucus (D-Mont.) recently announced proposed legislation that would amend the tax code. Among other provisions, the bill, known as “The Taxpayer Certainty and Relief Act of 2009,” (S. 722) would implement some much-discussed and anticipated changes to the federal gift and estate tax law.

The last major change to the federal gift and estate tax law was the Economic Growth and Tax Relief Reconciliation Act of 2001. A basic summary of the current law and the changes proposed by Senator Baucus, as provided by the AALU, is as follows:

Under current law, U.S. citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation skipping transfer tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a $3.5 million exemption for individuals ($7 million for couples). The gift tax has an exemption of $1 million ($2 million for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of $1 million, a 55% rate, and a 5% surtax on large estates.

The proposal would make permanent the 2009 estate, gift, and generation skipping transfer tax laws going forward and index the exemption amount. The proposal would also reunify the estate and gift taxes. In addition, the proposal would allow portability of exemption for spouses. Finally, the proposal would increase the amount available under the special use valuation revaluation to equal the estate tax exemption. (AALU Washington Report, 3/26/2009)

In other words, as proposed, there would be no estate tax repeal for 2010. Instead, the estate tax exemption would remain at $3.5 million. A maximum tax rate of 45% would also continue into 2010. In addition, beginning in 2011, the exemption would be pegged to inflation. So, for example, a 3% CPI increase in 2010 would result in a $3,610,000 exemption for 2011.

Under current law, the estate tax exemption for 2009 is $3.5 million, but the gift tax exemption is still only $1 million. Gifts that do not qualify for the annual gift tax exclusion use the lifetime gift tax exemption. The proposed legislation would reunify gift and estate tax by increasing the gift tax exemption to the same level as the estate tax.

The proposed portability of exemption for spouses would preserve the exemption of the first spouse to die, even where the exemption amount was left outright to the surviving spouse. Under current law, couples who together have assets over $3.5 million would have to create a trust (such as a credit shelter trust) to preserve the exemption following the first spouse’s death. Under the proposed legislation, however, the estate of the first spouse to die can elect on the estate tax return to preserve any unused portion of the exemption.

A few more points about the portability proposal:

If the proposed bill becomes law, it seems that it would make sense to file a federal estate tax return even for small estates, since by doing so an unused spousal exemption can be preserved.

The proposed bill allows a surviving spouse to use the aggregate unused exemptions of all marriages, but unused exemptions cannot exceed the basic exclusion amount applicable at the time the surviving spouse dies. This prevents the accumulation of unused spousal exemptions from multiple marriages.

As Greg Herman-Giddens of the North Carolina Estate Planning Blog and others have pointed out, the proposal wouldn’t make credit shelter trusts a thing of the past, since a credit shelter trust also protects the growth of the trust assets from being taxed in the survivor’s estate. A credit shelter trust can also be used to protect assets from creditors and future spouses.

Beyond that, the portability proposal raises a whole new set of potential issues, especially with regard to estate planning for a surviving spouse in a second or third marriage whose estate can potentially benefit from the unused exemption of a previous deceased spouse.

The Baucus proposal is currently in the Senate Finance Committee. To become law, it would still have to survive the committee, pass votes in both houses of Congress and be signed by the President.

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