Saturday, September 26, 2009

Reform of Estate Tax Put Off Until 2010

Faced With Lengthening Debate On Health Care, Congress Puts Off Estate Tax Reform.

As I've written before, the Estate Tax, which taxes the estates of the richest taxpayers who die, was set to expire in 2011, due to action taken by the Bush Republican Congress in 2002. Congress could not balance the budget and pass a massive tax cut for wealthy Americans at the same time, so the tax cuts were set to expire by next year. Congress will now have to decide what if anything to do about them by that time or there will be no Estate Tax in 2010, and in 2011 the law will expire and the tax will revert to the way it was in 2001, with a $1 million exemption (estates worth less than $1 million would pay no tax).

Since this would hit lots of middle-class taxpayers who own property in expensive states like California or New York, it was considered virtually certain that Congress will act before then. "Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year" reports published in The Hill note. Allowing the tax to expire would provide a wind-fall to the ultra-rich who pay all of the tax under today's rules (the current exemption is $3.5 million and $7 million for a married couple), so allowing the tax to expire would blow another hole in the deficit, which Democratic lawmakers are eager to avoid (the government would lose $19 billion in revenues from allowing the tax to expire).

As with the Health Care Bill, the chief holdup seems to be Sen. Max Baucus, whose committee "hasn’t scheduled when it would consider new estate tax legislation. The panel is busy with the healthcare reform bill, which is likely to occupy the committee until October."

Why Should I Care?

While it is unlikely that Congress will allow the Estate Tax to hit middle class families by letting the law revert to what it was in 2001 (a $1 million exemption), Estate Planners will have to watch and see what develops.

Those with property worth at least $1 million (including real estate) should consider having an expert review your estate plan for tax implications. After all, Congress has screwed up before, and it's possible that there will be continued deadlock between Republicans and Conservatives who insist on a complete repeal of the Estate Tax (despite increasing the deficit), and Democrats who want to see the current rates continue.

One common sense solution that seems unlikely to pass is that proposed by Rep. Mike Thompson (D-Calif.), a Ways and Means Committee member, has proposed excluding family farms and ranches from the estate tax.

“When farms pass from generation to generation, too often families have to sell the farm to developers in order to pay the estate taxes,” Thompson said in a statement. “We need to preserve our farms and open spaces for the next generation.”

This reform would allow (working) family farms and ranches to be excluded from the tax. Combined with setting the tax to exempt estates worth less than $3.5 million would mean no middle-class taxpayers need ever worry about this tax; which is as it should be! The Estate Tax was designed to prevent the build-up of an aristocracy of un-earned wealth and privilege and was NEVER intended to catch middle-class taxpayers because of increases in real estate prices.

4 comments:

  1. Pretty good analysis, but you've made two big mistakes:

    1. Those "few" taxpayers whose assets exceed $3.5M number in the tens of thousands, and their "estates" consist of a large part of the
    cumulative savings of the country, including in many cases the business assets of family-owned firms and farms. From 1995-2005, for example, estate taxes were paid by 37,000 "closely held businesses," 24,000 family farms, 50,000 limited-partnerships and nearly 28,000 "other" businesses, such as sole proprietorships.
    Consider the range of typical family-owned businesses whose assets are likely to exceed $3.5 million, the amount exempt from estate taxes under current law. This includes almost any size manufacturer; farms and ranch owners, especially in areas where property values have increased dramatically over time;
    truck, auto, farm and building-equipment dealers; large auto repair shops; trucking companies; construction firms; motels;
    many restaurants including fast-food franchises, daily newspapers, independent pharmacies and all types of other retailers. It's not just farmers, Johnny boy.

    Big mistake #2

    You seem to think that increasing the deficit is something that should be avoided.

    You're right it SHOULD be avoided, but that can easily be accomplished by cutting Federal spending.

    I know, I worked inside the beltway for several years. The roster of federal employees could be cut by 25% and nobody would even notice (except the pigs-at-the-trough who got fired and had to go find a way to make an honest living). If you know even one honest federal employee, you know what I'm saying is true.

    Or consider the massive fraud, incompetence, waste, and malfeasance committed by our friends the IRS --- look up Sklar v. IRS or (on a completely different theme) visit the following website describing how the IRS reached a secret agreement with Scientology to hush up the fact that Scientology had revealed countless cases of IRS fraud or other misconduct --- the IRS caved because the Scientologists blackmailed the IRS, pure and simple.

    You should know this stuff if you are advising people on Estate planning. I'm glad I'm not your client.


    http://www.nytimes.com/1997/03/09/us/scientology-s-puzzling-journey-from-tax-rebel-to-tax-exempt.html?sec=&spon=&pagewanted=all

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  2. #1 - "Tens of thousands" out of millions of estates is not a lot in a country of 300 million.

    #2 - There are LOTS of complex estate planning techniques available for large estates. NO PROBLEM!

    I'm not giving an advanced Estate Planning seminar for large estates here. I'm providing basic information for middle class individuals who might actually have to pay some tax, but who won't have to if they have a proper estate plan!

    The multitude of planning techniques for the wealthy that I wouldn't normally need for my middle class clients include:

    * Charitable lead trusts
    * Charitable remainder trusts
    * Various asset shifting techniques for small businesses including gifting techniques and valuation strategies.

    All of these are perfectly legal. I never advocate any "tax dodge" such as arguing with the IRS about the "constitutionality" of the Revenue Code or overseas tax shelters that can wind up putting my clients in prison when they are ordered to repatriate assets and are unable to comply.

    Yet, I've NEVER had one single client who will pay a DIME in tax as a result of the estate tax!

    Couples whose net worth is greater than $7 million are quite rare. I don't have any clients who fit into that category and that's less than 1% of the population.

    I am not at all concerned by the tax fears of the top 1%. They can hire lawyers like me and either mitigate or avoid paying any tax.

    For the few super-rich who will wind up paying some tax despite Estate Planning, I fail to see why the tax laws ought to be written to favor them instead of the middle class.

    The vast and overwhelming majority of the American people also agree with me. The middle class shouldn't have to pay this tax.

    The rich should. It's been part of English common law for over 1,000 years and there's no reason to change it because a few ultra-rich decided to lobby Congress to shift the tax burden onto the rest of us by eliminating the estate tax, and are marketing it to the American people by pretending they will be hit by this tax. They won't and shouldn't be.

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  3. I am pretty sure that the amount in 2001 was $675,000, not $1,000,000. My father passed away that year.
    When doing trusts for the middle class, please recommend either making all the children the trustees or none of them, as no matter what parents think about their darling offspring, handling money can make sinners out of most.
    Lastly, do not recommend professional trustees to clients, they may appear to be a safe bet in following the trust of the client that created it, but again greed rules in the USA, so they can end up having more of a take of the money, than the beneficiaries.
    At this point, I'd recommend that anyone that has any amount of wealth should use the option of gifting the money to their children, friends, significant others, while they are alive.

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  4. Thanks for your comments, Houdiniwho!

    Point #1. The Unified Credit amount PRIOR to the Bush reconciliation act of 2001 was $1,000,000 because it had been recently amended by Congress. That amendment is permanent, but the Bush 2001 tax act expires in 2011.

    The Bush tax bill made the Estate Tax exemption rise to $3.5 million today. In 2010 there will be no estate tax, and in 2011 it will revert back to the way it was in 2001.

    The Gift Tax exemption is still $1 million lifetime. That hasn't changed.

    Point #2: A professional trustee is often needed. You have NO idea how complicated and time-consuming it is to act as trustee when there are multiple beneficiaries.

    Non-professional trustees are subject to similar responsibilities as Professional ones.

    Your comment inspired me to write a short blog about when to use a professional trustee. I have no axe to grind. I never serve as a professoinal trustee!

    Sometimes it's useful, but it can be expensive.

    But, it's better sometimes to bear the expense than to be sued by a beneficiary because they're unhappy with the trust administration and think you should have used a different investment strategy, made different distributions or some other reason!

    Non-professionals are not getting paid to do this job and it's a pain in the butt at best, and can get you in serious legal trouble at worst if you don't know what you're doing.

    October 19, 2009 10:44 AM

    Thanks for your comments, Houdiniwho! Point #1. The Unified Credit amount PRIOR to the Bush reconciliation act of 2001 was $1000,000 because it had been recently amended by Congress. That amendment is permanent, but the Bush 2001 tax act expires in 2011. The Bush tax bill made the Estate Tax exemption rise to $3.5 million today. In 20120 there will be no estate tax, and in 2011 it will revert back to the way it was in 2001. The Gift Tax exemption is still $1 million lifetime. That hasn't changed. Point #2: A professional trustee is often needed. You have NO idea how complicated and time-consuming it is to act as trustee when there are multiple beneficiaries. Non-professional trustees are subject to similar responsibilities as Professional ones. Your comment inspired me to write a short blog about when to use a professional trustee. I have no axe to grind. I never serve as a professoinal trustee! Sometimes it's useful, but it can be expensive. But, it's better sometimes to bear the expense than to be sued by a beneficiary because they're unhappy with the trust administration and think you should have used a different investment strategy, made different distributions or some other reason! Non-professionals are not getting paid to do this job and it's a pain in the butt at best, and can get you in serious legal trouble at worst if you don't know what you're doing.

    ReplyDelete

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