The ridiculously raucous Estate Tax debate

[jbm]

Question about estate taxes. If McClane simply passed the franchise down to his children, who sets the taxable value of the inheritance?  Also, if sold now, are there other benefits to the children besides saving them from the hassle of selling and having cash to pay the estate taxes from.

[juliogotay]

If the offer on the table doesn't work out, I wonder if the Houston businessman (can't remember his name) that was considered a serious bidder for the Rangers would re-surface.

[Limey]

We were actually warned at work about estate taxes changing after this year.  The person presenting the information to us woefully unprivileged to worry about large amounts of money being gobbled up by the gubmint was very animated.  In short, he made it sound as if that if you have a large estate to leave your children, they may be planning to kill you this year to avoid this taxation.

It's the squawking about "Death Taxes" that get people all riled up about it.  Even the old tax used to apply to less than 1% of the population, and that wasn't the bottom 1%.  The noise level is to get people to whom this does not matter, to give a shit and vote against their best interests (taxes not raised through estate taxes get levied somewhere else).

In principle, the estate tax is there to collect unrealised capital gains; in that if you sell something to someone else you pay tax on any capital gain, but if you bequeath it to someone that capital gain would never get taxed and could roll on for generation after generation - adding value, changing hands, and never being taxed.

If you agree in principle, then the estate tax, in principle, is not a problem.  I'm not a tax attorney, nor did I stay at a Holiday Inn last night, but I would bet my entire inheritance on the estate tax code being a giant clusterfuck.

[OregonStrosFan]

If the offer on the table doesn't work out, I wonder if the Houston businessman (can't remember his name) that was considered a serious bidder for the Rangers would re-surface.

Jim Crane. I'd think that ship has sailed, but ya never know.

[S.P. Rodriguez]

Jim Crane. I'd think that ship has sailed, but ya never know.

Or aggressive negotiation tactics with an individual who has proven a willingness to do the same. 

[Noe]

It's the squawking about "Death Taxes" that get people all riled up about it.  Even the old tax used to apply to less than 1% of the population, and that wasn't the bottom 1%.  The noise level is to get people to whom this does not matter, to give a shit and vote against their best interests (taxes not raised through estate taxes get levied somewhere else)

Hmmmm... interesting.  So, bottomline, I should not worry about this little diddy either:

http://www.msnbc.msn.com/id/34822140/ns/politics-howard_fineman/

To help pay for health care, Obama chose to back the idea of raising $150 billion with an excise tax on the value of so-called “Cadillac” health insurance plans purchased by companies or individuals.

Academic experts say the tax would save money by imposing greater cost consciousness; labor unions are vehemently opposed, and AFL-CIO President Rich Trumka on Monday told the president so.

Obama told Trumka that he would reconsider the idea. But I doubt that he will abandon it. One reason why is that he may well want to use another health care financing idea for general deficit reduction; that idea is a surtax on individual income above $500,000 and family income above $1 million.

The “hit the rich” tax would generate a whopping $450 billion over ten years. It’s a fat budgetary piggy bank, but one you can only break once. “You can only tax `rich people’ so many times before you run out revenue, “ said Maya MacGuineas of the Committee for a Responsible Federal Budget. “Once you do the surtax, that’s it. You can’t use it twice.”

Funny thing is, the whole idea in this here country is a man and woman is allowed to strive to become millionaires.  Seems the idea to tax once is good advice because if it becomes very "costly" to be too rich, then one must think you have to strive to stay away from the top 1%.  Just today I found out two of the people in our company became millionaires because of the sale of our company. 

Boy, I bet they're sure pissed off about it too!

[Bench]

Hmmmm... interesting.  So, bottomline, I should not worry about this little diddy either:

http://www.msnbc.msn.com/id/34822140/ns/politics-howard_fineman/

Funny thing is, the whole idea in this here country is a man and woman is allowed to strive to become millionaires.  Seems the idea to tax once is good advice because if it becomes very "costly" to be too rich, then one must think you have to strive to stay away from the top 1%.  Just today I found out two of the people in our company became millionaires because of the sale of our company. 

Boy, I bet they're sure pissed off about it too!

I love the argument that people won't try to make money for fear of paying taxes.

Nobody I know, that's for sure.

[Noe]

I love the argument that people won't try to make money for fear of paying taxes.

Nobody I know, that's for sure.

It's funny to me too because rich people... well, they don't get rich by being lucky and stupid.  Usually, the great majority of them know how to shield money from the Gubmint.  Who is left to tax?

[juliogotay]

Hmmmm... interesting.  So, bottomline, I should not worry about this little diddy either:

http://www.msnbc.msn.com/id/34822140/ns/politics-howard_fineman/

Funny thing is, the whole idea in this here country is a man and woman is allowed to strive to become millionaires.  Seems the idea to tax once is good advice because if it becomes very "costly" to be too rich, then one must think you have to strive to stay away from the top 1%.  Just today I found out two of the people in our company became millionaires because of the sale of our company. 

Boy, I bet they're sure pissed off about it too!

My guess is that the "Cadillac" tax will become law but that union members will be excluded.

[juliogotay]

It's the squawking about "Death Taxes" that get people all riled up about it.  Even the old tax used to apply to less than 1% of the population, and that wasn't the bottom 1%.  The noise level is to get people to whom this does not matter, to give a shit and vote against their best interests (taxes not raised through estate taxes get levied somewhere else).

In principle, the estate tax is there to collect unrealised capital gains; in that if you sell something to someone else you pay tax on any capital gain, but if you bequeath it to someone that capital gain would never get taxed and could roll on for generation after generation - adding value, changing hands, and never being taxed.

If you agree in principle, then the estate tax, in principle, is not a problem.  I'm not a tax attorney, nor did I stay at a Holiday Inn last night, but I would bet my entire inheritance on the estate tax code being a giant clusterfuck.

This will affect alot more than 1% of Americans. Perhaps tens of millions. Many middle-class Americans have $1 million estates between homes values, savings and insurance policies. This is particularly devastating to family businesses, farms and ranches. Many of those assets will have to be sold. This is theft.

[MusicMan]

This is theft.

I generally frown upon smileys, but I need a good eye-roll icon here.

[Bench]

This will affect alot more than 1% of Americans. Perhaps tens of millions. Many middle-class Americans have $1 million estates between homes values, savings and insurance policies. This is particularly devastating to family businesses, farms and ranches. Many of those assets will have to be sold. This is theft.

Don't you think that all taxes are theft?

[BudGirl]

Don't you think that all taxes are theft?

I don't.

[juliogotay]

Don't you think that all taxes are theft?

No. 55%, yes.

[Bench]

I don't.

Me neither. 

[JimR]

Don't you think that all taxes are theft?

hell, no.

[Limey]

This will affect alot more than 1% of Americans. Perhaps tens of millions. Many middle-class Americans have $1 million estates between homes values, savings and insurance policies. This is particularly devastating to family businesses, farms and ranches. Many of those assets will have to be sold. This is theft.

This is also wrong.

In 2007, 2,424,000 people died.  Of those, only 33,000 filed estate tax returns and of those, only 14,200 actually paid any estate tax.  Estate tax impacts a fraction of a fraction of the population.

The second link above estimates that, when the threshold resets to $1mm in 2011, circa 44,000 estates will pay estate tax.  If the number of deaths remains roughly constant, that means that about 1.75% of people who die will leave behind any estate tax liability.

[toddthebod]

I thought that insurance passed outside of the estate. 

[Limey]

I thought that insurance passed outside of the estate. 

This is the problem with the "debate" over estate taxes.  Most of the people who are rabidly anti, don't actually know how it applies.  The average family income in the U.S. is circa $40,000 per annum; 98% of the population should not give a fuck about estate taxes.

[homer]

This is the problem with the "debate" over estate taxes.  Most of the people who are rabidly anti, don't actually know how it applies.  The average family income in the U.S. is circa $40,000 per annum; 98% of the population should not give a fuck about estate taxes.

So, in your world, someone has to be directly affected by a policy to be allowed to 'give a fuck' about it?

[HudsonHawk]

I thought that insurance passed outside of the estate. 

In general, life insurance is included as part of the gross estate for tax purposes.  But Limey is correct, relatively very few citizens inherit a taxable liability in excess of the $1 MM exemption.  Which is why the exemption is set where it's at.  It's designed to prevent the rich from avoiding taxes on their capital gains by simply willing them to the next person.  It's not designed to punk your average person who inherits their parents house and dad's stamp collection.

[austro]

I thought that insurance passed outside of the estate. 

I thought so, too, thereby allowing one to purchase insurance that would pay off enough to allow the heirs to pay the estate tax without having to liquidate some or all of the estate.

[Limey]

So, in your world, someone has to be directly affected by a policy to be allowed to 'give a fuck' about it?

Good point.  What I'm trying to get at is that many of the those who virulently oppose the tax, do so under the mistaken impression that it will impact them directly.  Drayton?  Sure.  Pretty much everyone on this board?  Nope.

Those who oppose the tax on principle - have at it.  My only issue is when wild accusations get thrown around, such as claiming that the tax will hit "perhaps tens of millions".  It's this kind of inaccurate rhetoric that gets people all fired up for no good reason.

[MusicMan]

I thought so, too, thereby allowing one to purchase insurance that would pay off enough to allow the heirs to pay the estate tax without having to liquidate some or all of the estate.

My understanding of estate tax is not as good as I would like, but a Life Insurance Trust is one of the first steps most any financial planner will take to get around the inclusion of the insurance, as I understand it.

[Jacksonian]

This is the problem with the "debate" over estate taxes.  Most of the people who are rabidly anti, don't actually know how it applies.  The average family income in the U.S. is circa $40,000 per annum; 98% of the population should not give a fuck about estate taxes.

Some of the confusion is lack of understanding the tax laws.  There are a large number of people with total estates over $1mil.  However, when passed on the estate is divided down.  Most of the division reduces the individual's take to less than $1mil so no tax.  The tax is not on the total estate.

[MusicMan]

Some of the confusion is lack of understanding the tax laws.  There are a large number of people with total estates over $1mil.  However, when passed on the estate is divided down.  Most of the division reduces the individual's take to less than $1mil so no tax.  The tax is not on the total estate.

I do not believe this is correct.  Estate tax is assessed on the entirety on the estate, before passing on to any individual.

[HudsonHawk]

My understanding of estate tax is not as good as I would like, but a Life Insurance Trust is one of the first steps most any financial planner will take to get around the inclusion of the insurance, as I understand it.

The first thing my wife, CPA, tells here clients (whom she refers to as "high income individuals") is "be wary of your financial planner."

[toddthebod]

My understanding of estate tax is not as good as I would like, but a Life Insurance Trust is one of the first steps most any financial planner will take to get around the inclusion of the insurance, as I understand it.

I was wondering why I had an irrevocable life insurance trust.  I guess this is why.

[MusicMan]

The first thing my wife, CPA, tells here clients (whom she refers to as "high income individuals") is "be wary of your financial planner."

I agree with this advice.

[Bench]

I was wondering why I had an irrevocable life insurance trust.  I guess this is why.

I vaguely remember something from Wills & Estates that irrevocable = non-taxable and revocable = taxable.

[HudsonHawk]

Some of the confusion is lack of understanding the tax laws.  There are a large number of people with total estates over $1mil.  However, when passed on the estate is divided down.  Most of the division reduces the individual's take to less than $1mil so no tax.  The tax is not on the total estate.

I don't believe this is correct, though I'm not a CPA, only sleep with one.  The reason most people don't pay estate tax is simply because their taxable inheritance is less than the exemption.  You only pay tax on the capital gain of the estate, not the total.  So if mom owns a home worth $1 MM, but paid $200 M for it and put in $200 M of improvements to *get* it to it's $1 MM value, then only $600,000 is taxable.  So add the $600,000 to her $200,000 life insurance and the $100,000 woth of stock and the $100,000 in cash she had stuffed in the mattress, it's only a taxable amount of $1 MM.  Exempt from estate tax.

[VirtualBob]

I don't believe this is correct, though I'm not a CPA, only sleep with one.  The reason most people don't pay estate tax is simply because their taxable inheritance is less than the exemption.  You only pay tax on the capital gain of the estate, not the total.  So if mom owns a home worth $1 MM, but paid $200 M for it and put in $200 M of improvements to *get* it to it's $1 MM value, then only $600,000 is taxable.  So add the $600,000 to her $200,000 life insurance and the $100,000 woth of stock and the $100,000 in cash she had stuffed in the mattress, it's only a taxable amount of $1 MM.  Exempt from estate tax.

Either you or the CPA you were sleeping with at the time was obviously distracted.  I'm glad you at least had your priorities right.

[HudsonHawk]

Either you or the CPA you were sleeping with at the time was obviously distracted.  I'm glad you at least had your priorities right.

Not sure what this means.  Are you saying I'm incorrect?

[Jacksonian]

I do not believe this is correct.  Estate tax is assessed on the entirety on the estate, before passing on to any individual.

Well then I was misinformed.

[Jacksonian]

So if mom owns a home worth $1 MM, but paid $200 M for it and put in $200 M of improvements to *get* it to it's $1 MM value, then only $600,000 is taxable. 

I asked the IRS this kind of thing once and the person told me it was:

Value of the property at time of death (inheritance) = amount potentially subject to tax.

or

Value of the property at time of sale/Value of the property at time of death (inheritance) = amount potentially subject to tax.

time frame of sale being important

[HudsonHawk]

I asked the IRS this kind of thing once and the person told me it was:

Value of the property at time of death (inheritance) = amount potentially subject to tax.

or

Value of the property at time of sale/Value of the property at time of death (inheritance) = amount potentially subject to tax.

time frame of sale being important

I think there are various ways that the basis can be established.  But I'm not sure.  I know enough accounting to be dangerous to myself and others.  I guess I should shut the fuck up.

[Jacksonian]

I think there are various ways that the basis can be established.  But I'm not sure.  I know enough accounting to be dangerous to myself and others.  I guess I should shut the fuck up.

Or the irs person on the phone wasn't up to speed.

[MusicMan]

Or the irs person on the phone wasn't up to speed.

Highly likely.

[Andyzipp]

Highly likely.

Hey! That's a government employee you're talking about.

[juliogotay]

This is also wrong.

In 2007, 2,424,000 people died.  Of those, only 33,000 filed estate tax returns and of those, only 14,200 actually paid any estate tax.  Estate tax impacts a fraction of a fraction of the population.

The second link above estimates that, when the threshold resets to $1mm in 2011, circa 44,000 estates will pay estate tax.  If the number of deaths remains roughly constant, that means that about 1.75% of people who die will leave behind any estate tax liability.

I'll accept your source for the numbers and admit that I was wrong on the number of Americans affected. It surprises  me that there would not be alot more Americans with assets in excess of $1 million today, particularly in areas like California and the east coast where property values are so high.

I have friends currently stressing with this issue in regards to South Texas ranchland that has been in their family for 50 years and they are afraid they will have to sell the property when the patriach dies because they won't have a means of paying the tax. They've done the Generation Skipping and everything else they can legally do to make it work but it may not work at 55%.

[Limey]

I vaguely remember something from Wills & Estates that irrevocable = non-taxable and revocable = taxable.

So...the difference is "ir", which = "Internal Revenue".

[Limey]

Either you or the CPA you were sleeping with at the time was obviously distracted.  I'm glad you at least had your priorities right.

Nope.  HH is one of the few in the enviable position of fucking a CPA, instead of getting fucked by one.

[HudsonHawk]

I have friends currently stressing with this issue in regards to South Texas ranchland that has been in their family for 50 years and they are afraid they will have to sell the property when the patriach dies because they won't have a means of paying the tax. They've done the Generation Skipping and everything else they can legally do to make it work but it may not work at 55%.

While I understand their situation, I have little sympathy for them.  There is no inherent right to free property, and they will essentially have a million plus dollars handed to them.  99% of the population wishes they had that kind of stress.

[BizidyDizidy]

Why not just a 95% tax on all inheritance over 30 million or something? I wonder how the revenue would split out? While normally I would just as soon the government take as little money as possible, this is an area where I am of a similar mind to Buffet. Much rather raise money by eliminating huge dynastic wealth transfer than pay it out of my salary.

[Limey]

Why not just a 95% tax on all inheritance over 30 million or something? I wonder how the revenue would split out? While normally I would just as soon the government take as little money as possible, this is an area where I am of a similar mind to Buffet. Much rather raise money by eliminating huge dynastic wealth transfer than pay it out of my salary.

Bingo!

If the United States is the land of opportunity, then make your own money and inheritance is not an issue.

Call it the Paris Hilton Initiative!

[geezerdonk]

If?

[Limey]

If?

Yep.

If...it is the land of opportunity, then those complaining that they can't get freebie, hand-me-downs from their parents, without the IRS taking a share, are whiney bitches.

I thought the whole point was that anyone can make it here if they try hard enough.  I did (I know you won't believe me, but it's true).

[Lurch]

Yep.

If...it is the land of opportunity, then those complaining that they can't get freebie, hand-me-downs from their parents, without the IRS taking a share, are whiney bitches.

I thought the whole point was that anyone can make it here if they try hard enough.  I did (I know you won't believe me, but it's true).

Great!  So why start at $1MM?

[Limey]

Great!  So why start at $1MM?

Right!  These are all valid debates.  Amount...threshold...what's taxable...what's not...etc.  What's not valid is simply declaring estate (death) tax as evil incarnate and then working back from there.

Anyone who likes paying taxes of any description...raise your hand...

[Jacksonian]

Right!  These are all valid debates.  Amount...threshold...what's taxable...what's not...etc.  What's not valid is simply declaring estate (death) tax as evil incarnate and then working back from there.

Anyone who likes paying taxes of any description...raise your hand...

So your avatar has a raised hand...

[HudsonHawk]

Great!  So why start at $1MM?

Because the government recognizes that people have certain possessions that they would like to pass on to others, things of nominal or sentimental value.  That's the point of the exemption.  Again, estate tax is to prevent dynastic hoarding of untaxable wealth, not to force people have to sell their grandfather's pocket watch.

[Lurch]

Because the government recognizes that people have certain possessions that they would like to pass on to others, things of nominal or sentimental value.  That's the point of the exemption.  Again, estate tax is to prevent dynastic hoarding of untaxable wealth, not to force people have to sell their grandfather's pocket watch.

I agree with your explanation in concept, but surely you agree that $1MM is excessive for nominal and sentimental valued items.  It seems likely that it was decided upon because those voting for it (or, more accurately, those asking their elected officials to support it)more than likely would never find themselves in position to pay it.  While I appreciate the importance of a graduated tax system, I don't see why more (if not everyone) can't share at least some of the burden of a such an aggressive tax they otherwise support.  At least a voting majority.

[Bench]

It seems likely that it was decided upon because those voting for it (or, more accurately, those asking their elected officials to support it)more than likely would never find themselves in position to pay it. 

Yeah... 'cause that's totally how Congress works.  Assholes always listening to the little guy and screwing over the fat cats.

[HudsonHawk]

I agree with your explanation in concept, but surely you agree that $1MM is excessive for nominal and sentimental valued items.

It's certainly generous.  Which is why it's puzzling that so many people are bitching about it.

  It seems likely that it was decided upon because those voting for it (or, more accurately, those asking their elected officials to support it)more than likely would never find themselves in position to pay it.  While I appreciate the importance of a graduated tax system, I don't see why more (if not everyone) can't share at least some of the burden of a such an aggressive tax they otherwise support.  At least a voting majority.

I don't necessarily disagree with you.  Of course I assume you would hold the same logic for exemptions of any kind, including those on regular income tax?

[Lurch]

Yeah... 'cause that's totally how Congress works.  Assholes always listening to the little guy and screwing over the fat cats.

Ugh, "fat cats"?  Really? 

Certainly those looking to get re-elected look to large donors (be it the wealthy and/or corps) to get there, but of course they listen to "the little guy" when in that particular context it is 99.9% of the voters they need to do so.

[Lurch]

It's certainly generous.  Which is why it's puzzling that so many people are bitching about it.

Just principle for me.  I'm certain I won't be getting anything from my family.

I don't necessarily disagree with you.  Of course I assume you would hold the same logic for exemptions of any kind, including those on regular income tax?

I can honestly say I'd be willing to pay more tax if it was clear that everyone was sharing the burden for the measures they're backing.  It just doesn't appear to be the way this is trending.  Not bashing our President, either.  This was happening under the prior administration, too, with something like 40% now netting $0 in Federal income tax paid.  We have a serious budget crises that must be addressed. The easy way out is to tax the top brackets only, as this appears to blatantly do.

[chuck]

Because the government recognizes that people have certain possessions that they would like to pass on to others, things of nominal or sentimental value.  That's the point of the exemption.  Again, estate tax is to prevent dynastic hoarding of untaxable wealth, not to force people have to sell their grandfather's pocket watch.

Reminds me, did you ever get that watch looked at?

[HudsonHawk]

Reminds me, did you ever get that watch looked at?

It is being restored as we speak.  Should get it back in a few weeks.  They said the movement was completely dry, but other than that, it was in good shape.  They're going to clean everything, replace the stem and crown, and refurbish the casing.  And put on a new Omega band.  They said it'll look brand new.  I'm hoping so.

[chuck]

It is being restored as we speak.  Should get it back in a few weeks.  They said the movement was completely dry, but other than that, it was in good shape.  They're going to clean everything, replace the stem and crown, and refurbish the casing.  And put on a new Omega band.  They said it'll look brand new.  I'm hoping so.

Awesome. Can't wait to see it. How did you choose an outfit to restore it?

[HudsonHawk]

Just principle for me.  I'm certain I won't be getting anything from my family.

I can honestly say I'd be willing to pay more tax if it was clear that everyone was sharing the burden for the measures they're backing.  It just doesn't appear to be the way this is trending.  Not bashing our President, either.  This was happening under the prior administration, too, with something like 40% now netting $0 in Federal income tax paid.

So would you support doing away with the standard exemption and all deductions on income tax?

  We have a serious budget crises that must be addressed. The easy way out is to tax the top brackets only, as this appears to blatantly do.

You seem to fundamentally misunderstand the purpose of the estate tax.  It's not a quick way to increase government revenue.  It's not to place additional burden on Joe Sixpack and Sally Housecoat.  It's to prevent the richest 1% from evading taxes they would otherwise owe.  It's the same as the gift tax, which is designed to keep the rich from "gifting" their money back and forth with each other to avoid paying taxes on it.  Though I assume you have a problem with it as well. 

[HudsonHawk]

Awesome. Can't wait to see it. How did you choose an outfit to restore it?

Called around to reputable jewelers who were licensed Omega dealers.  They hooked me up with their preferred guy.  He gave it the once over and estimate for free, and the jeweler guarantees the work for 2 years.  I thought it was a pretty fair deal.

[S.P. Rodriguez]

returning the thread to it's original topic, anyone else see the latest from the Chron?

http://www.chron.com/disp/story.mpl/sports/bb/6819744.html

Are they trying to suck up to McLane now?  Maybe earn their way back into Astros mgmt's good graces, maybe get their appointed beat writer clubhouse access (that might have been revoked for a muck-raking, race-card pulling, ass-wipe of a human being)?

I found it very interesting that someone at the Chron actually took the time to write an Astros historical perspective and reach the unavoidable conclusion that McLane has been an outstanding owner.  Go figure. 

[Andyzipp]

returning the thread to it's original topic, anyone else see the latest from the Chron?

http://www.chron.com/disp/story.mpl/sports/bb/6819744.html

Are they trying to suck up to McLane now?  Maybe earn their way back into Astros mgmt's good graces, maybe get their appointed beat writer clubhouse access (that might have been revoked for a muck-raking, race-card pulling, ass-wipe of a human being)?

I found it very interesting that someone at the Chron actually took the time to write an Astros historical perspective and reach the unavoidable conclusion that McLane has been an outstanding owner.  Go figure.  

Unsubstantiated rumor, but the Astros more or less let the Chronicle know that they would have trouble continuning to honor Ortiz's credentials at home games.

[Arky Vaughan]

You seem to fundamentally misunderstand the purpose of the estate tax.  It's not a quick way to increase government revenue.  It's not to place additional burden on Joe Sixpack and Sally Housecoat.  It's to prevent the richest 1% from evading taxes they would otherwise owe.  It's the same as the gift tax, which is designed to keep the rich from "gifting" their money back and forth with each other to avoid paying taxes on it.  Though I assume you have a problem with it as well.

The logic here is circular. "Evade" implies that someone is unlawfully intentionally not paying taxes. If there is no estate tax, then nobody, not the top 1% or anyone else, is "evading taxes they would otherwise owe." By the definition of "evade," the purpose of requiring someone to pay a tax cannot be to prevent someone from evading such tax.

[MusicMan]

If there is no estate tax, then nobody, not the top 1% or anyone else, is "evading taxes they would otherwise owe." By the definition of "evade," the purpose of requiring someone to pay a tax cannot be to prevent someone from evading such tax.

The purpose of the estate tax is, in part, to avoid individuals from holding capital assets o death, then passing them on with the resulting "step up" in basis, which would, essentially, avoid capital gains taxes.

[BizidyDizidy]

Couldn't you just as easily not step up the basis

[Mr. Happy]

So would you support doing away with the standard exemption and all deductions on income tax?

You seem to fundamentally misunderstand the purpose of the estate tax.  It's not a quick way to increase government revenue.  It's not to place additional burden on Joe Sixpack and Sally Housecoat.  It's to prevent the richest 1% from evading taxes they would otherwise owe.  It's the same as the gift tax, which is designed to keep the rich from "gifting" their money back and forth with each other to avoid paying taxes on it.  Though I assume you have a problem with it as well. 

The original legislative purposes of the federal estate tax were to finance World War I and to break up large concentrations of wealth. When originally passed, there was no gift tax, so people offloaded their property just before they thought that they were going to die, so in 1924 Congress enacted the first gift tax. In 1926, Congress added the grantor trust rules to the income tax to prevent people from shifting a lot of income down to other family members who were in lower tax brackets.

The wealthiest started paying federal estate tax every other generation through generation-skipping transfers, e.g., parents to grandchildren. In 1975, Congress put together the first generation-skipping transfer tax, but it was so unwieldy that it was repealed retroactively in 1986 and replaced with the version of that tax that sunset on December 31, 2009 but will reappear on January 1, 2011.

[HudsonHawk]

The original legislative purposes of the federal estate tax were to finance World War I and to break up large concentrations of wealth.

Financing war was the primary reason for instituting most taxes.  Federal income tax was instituted to pay for the Civil War. 

[TheWizard]

Financing war was the primary reason for instituting most taxes.  Federal income tax was instituted to pay for the Civil War. 

Did the rebellious south grumble when they had to pay income tax?

"0.34 cents this year! Does ga'damn Uncle Sam think I'm made of gold?!"

[Limey]

Couldn't you just as easily not step up the basis

That is, of course, an option.  But then you are still allowing wealth to transfer ownership from one person to another without collecting tax on the capital gain of the beneficiary.

If we work on the premise that tax is a necessity and that someone is going to have to pay it then, if you tax capital gains, an estate tax is an important part of that policy because it closes a loophole.

[Mr. Happy]

Financing war was the primary reason for instituting most taxes.  Federal income tax was instituted to pay for the Civil War. 

Actually, the current federal income tax required a constitutional amendment and became effective in 1913.

[BUWebguy]

Actually, the current federal income tax required a constitutional amendment and became effective in 1913.

But didn't they try it once before that, only to have it shot down -- thus necessitating the amendment?

[JimR]

why isn't this mind-numbing TAX discussion  thread hijack in B&Q?

[Mr. Happy]

But didn't they try it once before that, only to have it shot down -- thus necessitating the amendment?

They tried it a few times.

[HudsonHawk]

The logic here is circular. "Evade" implies that someone is unlawfully intentionally not paying taxes. If there is no estate tax, then nobody, not the top 1% or anyone else, is "evading taxes they would otherwise owe." By the definition of "evade," the purpose of requiring someone to pay a tax cannot be to prevent someone from evading such tax.

There are other taxes besides estate tax.  The purpose of the estate and gift tax is to prevent them from evading *those* taxes, not evading the estate tax.

[HudsonHawk]

Actually, the current federal income tax required a constitutional amendment and became effective in 1913.

Federal personal income tax required the Revenue Act of 1861.  The 16th Amendment was passed in response to challenges of the *way* income was being taxed.  1913 was not the first time incomes were taxed.

[Mr. Happy]

Federal personal income tax required the Revenue Act of 1861.  The 16th Amendment was passed in response to challenges of the *way* income was being taxed.  1913 was not the first time incomes were taxed.

As a former board certified tax attorney for over twenty years and a former estate and gift tax professor for five years, I'm well aware of that.

[HudsonHawk]

As a former board certified tax attorney for over twenty years and a former estate and gift tax professor for five years, I'm well aware of that.

Well, you seemed confused.  Just trying to help out.

[Arky Vaughan]

There are other taxes besides estate tax.  The purpose of the estate and gift tax is to prevent them from evading *those* taxes, not evading the estate tax.

So estate tax and gift tax are premised on the assumption that the people paying them must have cheated the government at some point, and this is the way to catch up with them? That seems like a pretty crappy reason to tax somebody. Morally repugnant, in fact.

[Arky Vaughan]

They tried it a few times.

The courts today wouldn't bat an eye about letting the federal government do that without a constitutional amendment, notwithstanding what the Constitution says. Of course, the federal government feels it can order all of us to buy health insurance too, so what real limits are there on its power?

[Arky Vaughan]

That is, of course, an option.  But then you are still allowing wealth to transfer ownership from one person to another without collecting tax on the capital gain of the beneficiary.

If we work on the premise that tax is a necessity and that someone is going to have to pay it then, if you tax capital gains, an estate tax is an important part of that policy because it closes a loophole.

Not necessarily. It depends on when you want to define a gain as having occurred.

[HudsonHawk]

So estate tax and gift tax are premised on the assumption that the people paying them must have cheated the government at some point, and this is the way to catch up with them? That seems like a pretty crappy reason to tax somebody. Morally repugnant, in fact.

No.  But nice strawman.

[Arky Vaughan]

No.  But nice strawman.

Nice dodge.

There are other taxes besides estate tax.  The purpose of the estate and gift tax is to prevent them from evading *those* taxes, not evading the estate tax.

What's your proof that they're evading the other taxes? If they paid those other taxes, are they then exempt from the estate tax and the gift tax?

[Limey]

Not necessarily. It depends on when you want to define a gain as having occurred.

Same thing for income tax.  What's income?  In both cases, a gain or income is whatever the code says it is.

[Arky Vaughan]

Same thing for income tax.  What's income?  In both cases, a gain or income is whatever the code says it is.

Agreed. Which is why considering a transfer at death to be realizing a gain is not a necessity, but a policy preference.

[Limey]

Agreed. Which is why considering a transfer at death to be realizing a gain is not a necessity, but a policy preference.

The threshold of $1mm is also a preference.  Income tax over sales tax is a preference.  Progressive over flat is a preference.  Capping payroll taxes is a preference.  Reducing the capital gains rate after 18 months is a preference.  Eliminating tax on dividends is a preference.  I could go on.

[HudsonHawk]

Nice dodge.

What dodge?  Rejecting your strawman is not dodging the issue.

What's your proof that they're evading the other taxes?

The proof was that they were simply giving the money to other people to avoid paying tax on their gains.  It's the historical record.  I'm not really sure what you're trying to argue.

If they paid those other taxes, are they then exempt from the estate tax and the gift tax?

Yes.

[BUWebguy]

The proof was that they were simply giving the money to other people to avoid paying tax on their gains.  It's the historical record.  I'm not really sure what you're trying to argue.

Not trying to argue -- I just don't understand this. When they made the income, they paid income tax, right? So how is giving it to someone else when they die avoiding taxes, thus necessitating an estate tax? I'm clearly missing something.

[MusicMan]

Not trying to argue -- I just don't understand this. When they made the income, they paid income tax, right? So how is giving it to someone else when they die avoiding taxes, thus necessitating an estate tax? I'm clearly missing something.

Large amounts of assets can be accumulated outside of defined "income".

[Gizzmonic]

Not trying to argue -- I just don't understand this. When they made the income, they paid income tax, right? So how is giving it to someone else when they die avoiding taxes, thus necessitating an estate tax? I'm clearly missing something.

What if you buy some scrub-land that turns out to be on top of an oilfield?

[HudsonHawk]

Not trying to argue -- I just don't understand this. When they made the income, they paid income tax, right? So how is giving it to someone else when they die avoiding taxes, thus necessitating an estate tax? I'm clearly missing something.

We're not talking about salary from an employer.  We're talking about the gains made on assets.  Let's say for example that someone, we'll call him John D. Rockefeller, buys an asset...a piece of land, a stock, what have you.  That asset is worth X amount of dollars at the time he aquires it.  Several years later, it's worth 100X.  If he were to sell that asset, he would otherwise owe a tax on the increase in value from what he sold it for and what he bought it for.  But what if he gives it to someone else and the recipient sells it?  The recpient then realizes no gain in the value from when they acquired the asset to when they sold it, and therefore would owe no taxes on it.  Or if Mr. Rockefeller wanted to give it to say his son and then have his son turn around and give it back to him, the whole capital gains tax could be easily avoided.  The estate/gift tax is designed to prevent those types of shenanigans.  It's not designed to make your average citizen pay taxes on inheriting grandma's piano or even your parents' cash bank account.  That's why there is a very generous $1MM exemption.

[BizidyDizidy]

But the estate tax doesn't take basis into account. If rockefeller sells his stock, pays capital gains, and passes the cash on, his kid is still hit with additional tax.

[HudsonHawk]

But the estate tax doesn't take basis into account. If rockefeller sells his stock, pays capital gains, and passes the cash on, his kid is still hit with additional tax.

On the cash over $1MM, yes.  Secondly, it does take basis into account.  His son's basis for that cash is $0.  And I'm not arguing the system is always perfect.

[Limey]

On the cash over $1MM, yes.  Secondly, it does take basis into account.  His son's basis for that cash is $0.  And I'm not arguing the system is always perfect.

Right.  And the tax, although based upon the value of the deceased's estate is, essentially, paid by the recipients.  Just like income.

[BUWebguy]

We're not talking about salary from an employer.  We're talking about the gains made on assets.  Let's say for example that someone, we'll call him John D. Rockefeller, buys an asset...a piece of land, a stock, what have you.  That asset is worth X amount of dollars at the time he aquires it.  Several years later, it's worth 100X.  If he were to sell that asset, he would otherwise owe a tax on the increase in value from what he sold it for and what he bought it for.  But what if he gives it to someone else and the recipient sells it?  The recpient then realizes no gain in the value from when they acquired the asset to when they sold it, and therefore would owe no taxes on it.  Or if Mr. Rockefeller wanted to give it to say his son and then have his son turn around and give it back to him, the whole capital gains tax could be easily avoided.  The estate/gift tax is designed to prevent those types of shenanigans.  It's not designed to make your average citizen pay taxes on inheriting grandma's piano or even your parents' cash bank account.  That's why there is a very generous $1MM exemption.

Gotcha. Thanks.

[MusicMan]

We're not talking about salary from an employer.  We're talking about the gains made on assets.  Let's say for example that someone, we'll call him John D. Rockefeller, buys an asset...a piece of land, a stock, what have you.  That asset is worth X amount of dollars at the time he aquires it.  Several years later, it's worth 100X.  If he were to sell that asset, he would otherwise owe a tax on the increase in value from what he sold it for and what he bought it for.  But what if he gives it to someone else and the recipient sells it?  The recpient then realizes no gain in the value from when they acquired the asset to when they sold it, and therefore would owe no taxes on it.  Or if Mr. Rockefeller wanted to give it to say his son and then have his son turn around and give it back to him, the whole capital gains tax could be easily avoided.  The estate/gift tax is designed to prevent those types of shenanigans.  It's not designed to make your average citizen pay taxes on inheriting grandma's piano or even your parents' cash bank account.  That's why there is a very generous $1MM exemption.

Let's say you have a milkshake, and I have a milkshake...