Death and Taxes Blog

I've posted a bit about the two major candidates for President, and their views on taxation. In the interest of providing a bit more information, I thought it might be helpful to see about the other four people who may appear on your ballot. Here's what their websites say on this issue:

Bob Barr (Libertarian Party)

Tax reform is desperately needed in the United States; but before we can reform the tax code, we must sharply reduce the tax burden on Americans. Meaningful tax reform begins with reining in government spending. Second, we need a tax code that makes taxation fairer and simpler for all citizens.

There are several alternative tax reform strategies. One would be to create a flat income tax, while cutting or eliminating many other levies, such as the estate tax (or “death tax”) and capital gains tax. Another option would be to replace the income tax and payroll taxes with a consumption tax, such as the Fair Tax

Ralph Nader (Independent)

Ralph Nader does not believe that "unearned income" (dividends, interest, capital gains) should be taxed lower than earned income, or work, inasmuch as one involves passive income, including inheritances and windfalls, while the latter involves active effort with a higher proportion of middle and lower income workers relying on and working each day, some under unsafe conditions, for these earnings.

Cynthia McKinney (Green Party) -- note that I couldn't find anything specific about estate tax on her website, but the Green Party's platform states the following:

The accumulation of individual wealth in the U.S. has reached grossly unbalanced proportions. It is clear that we cannot rely on the rich to regulate their profit-making excesses for the good of society through "trickle-down economics." We must take aggressive steps to restore a fair distribution of income. We support tax incentives for businesses that apply fair employee wage distribution standards, and income tax policies that restrict the accumulation of excessive individual wealth.

I would assume that's a vote to keep the estate tax.

Chuck Baldwin (Constitution Party) -- I also couldn't find anything specific on his website, but this is from the Constitution Party's platform:

[I]t is our intention to replace, with a tariff based revenue system supplemented by excise taxes, the current tax system of the U.S. government (including income taxes, payroll taxes, and estate taxes.)

If I missed any other candidates (Wiccan Party?), or if you have a link to more information about these candidates' views, please let me know.

This Wall Street Journal article has it. I REALLY like the idea, endorsed by both candidates(!), of making the estate tax exemption portable. Let me explain a bit about what that means:

There is an estate tax exemption -- right now it's $2 million, but it's going up to $3.5 million next year and, possibly, down to $1 million in 2011. (Don't ask -- it's a frickin' nightmare.) Anywho, the idea is that you can leave up to the exemption amount at your death, and it's free from estate tax. So, if I have $1.5 million in assets when I die, there's no estate tax. The problem is that there's also an estate tax marital deduction -- essentially (and I'm simplifying here), nothing you leave your spouse is subject to the estate tax. And if you get the marital deduction for your entire estate, you aren't using your exemption. This is a "use it or lose it" concept -- under current law, your spouse doesn't inherit your exemption. It's gone for good.

To give an example: what if I have $2 million, leave it all to my wife (who also has $2 million), and she then dies? Under this scenario, I had a $2 million exemption that I didn't use, and my wife dies with a $4 million estate and owes estate tax. My exemption is lost forever, unless I've taken steps to do some estate planning to take advantage of it. This is usually done by setting up trusts upon the death of the first spouse (for the benefit of the survivor), which allows the survivor the use of the property of the first spouse without the loss of the exemption.

The idea of portability is (presumably) that the exemption of the first spouse would be added to that of the survivor, so there's no need to set up a living trust for estate tax purposes. (There are, of course, lots of non-estate tax-related reasons to do so.) Hopefully this change to the law will be made no matter who wins the White House -- I'm sure that literally billions of dollars are "wasted" each year on fixing this problem, and billions of dollars more are lost to estate tax because people DIDN'T fix the problem.

Here (as a 58-page PDF) is a document detailing them, from the Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution). Page references below are to the pagination shown in the document itself:

Summary chart: page 6 (also a nice comparison on pages 37-9)

Senator McCain and the estate tax: page 8, 15, 17

Senator Obama and the estate tax: page 10, 19, 22-3

The Wall Street ran an editorial yesterday (praising anti-estate tax comments made by Whoopi Goldberg on "The View") that perfectly encapsulates the "battle" over the estate tax. Which is why I'll comment on that subject again, even though I run the risk of repeating myself.

As I've indicated before, I'm not a fan of the estate tax. But I'm even less of a fan of the methods used by the people who oppose the estate tax. Those people have made an industry out of lying to the American public about what the tax is, who it affects, and how it works. (The biggest but certainly not the only example: the mythical family of farmers whose livelihood is decimated by the estate tax.)

Let's begin with the name, since The Wall Street Journal talks about the "death tax." This is a made-up word, invented by people interested in manipulation. (Presumably "widows and orphans tax" was taken.) The Wall Street Journal states that "according to polls, some 70% of voters favor a full repeal." The Wall Street Journal doesn't tell us how that polling took place -- I imagine the questioning went something like this:

Do you oppose the patently unfair death tax, which takes money out of the mouths of widows, orphans, poor farmers, and even poorer small businessmen?

But the worst thing about the editorial is its mention of the fact that the estate tax represents double taxation. In a great many cases, it doesn't -- think, for instance, about retirement benefits and unrealized capital gains. Michael Kinsley addressed this issue more than 6 years ago, here. The whole article is good, but I'll let Mr. Kinsley speak for himself:

Indeed [the argument that estate taxation is double taxation] is probably the most tediously repeated sound bite of the estate-tax debate. It is also false. Not "controversial" or "disputed" or "misleading," but out-and-out false. Most of the accumulated wealth that is subject to the estate tax was never subject to the income tax.

This is so obviously, overwhelmingly true that anyone with the slightest business or financial experience surely knows it. Even George W. Bush. Well, probably even Bush. Yet he keeps on repeating the lie.

Maybe there is a solution here. Instead of the estate tax, could we all agree on a tax, to become effective upon death, of 100% of the value of a decedent's property that hasn't yet been subject to income tax? I presume that The Wall Street Journal would be more than happy to agree to such a tax since, if they are telling the truth, this new tax would generate absolutely no revenue.

I recently started subscribing to The Economist, and love it. This week's issue (October 27th - November 2nd) includes an interesting article entitled "The case for death duties," available online here. Essentially The Economist favors the estate tax (and Britain's death duty) for how they affect incentives and their fairness, but believe that the taxes could be simplified by turning these taxes into a "levy on inheritance." One interesting idea springing from this: setting different inheritance tax rates depending on a recipient's relationship with the decedent. Politicians, and other people who don't understand taxation or tax policy, always focus on simplifying the rate structure (whenever you hear somebody talking about simplifying the tax system merely by simplifying tax rates, walk away). I would agree with The Economist that the best thing to do would be to simplify the other aspects of the tax (whose complexity "has been a goldmine for the tax-advice industry").

1. I previously blogged about 529 plans, here and here. One of the nation's leading experts on these plans is Susan Bart, which whom I used to work. Ms. Bart has details here about some changes to Illinois law in this area. Most interesting to me is the creditor protection afforded to 529 plans.

2. This article talks about a Will contest and settlement involving former Massachusetts state representative Thomas Cahir. The scenario was (in my opinion) one of the most common: sibling vs. sibling. (The other we see fairly often is surviving second or third spouse vs. children of a prior marriage.) This quote, from one of the attorneys involved, is pretty accurate: "On the eve of trial the family decided to make a settlement, as is frequently the case in will contests." That's unfortunate -- it would be better for all parties to reach a settlement way before the eve of trial, but that's not human nature.

3. Evidently Hillary Clinton has come out with a tax proposal that involves keeping the estate tax exemption at its 2009 level ($3.5 million per person, which is potentially $7 million for a married couple). Here are a few details. Once I finish the article I'm working on, I'd like to put together a comparison of how the various candidates would handle the estate tax.

In the June 2007 edition of IICLE Estate Planning & Probate FlashPoints, Patricia Brosterhous mentions that the U.S. Treasury has proposed regulations dealing with the estate treatment of claims against an estate. This has always been a tricky area. On the one hand, we know that an estate tax deduction is allowed for claims against an estate pursuant to Section 2053(a)(3) of the Internal Revenue Code. On the other hand, the amount of these claims can be in question far beyond the date on which the estate tax return needs to be filed. How do we value these claims? Here's what the proposed regulations say:

[T]he proposed regulations adopt rules based on the premise that an estate may deduct under section 2053(a)(3) only amounts actually paid in settlement of claims against the estate. If the resolution of a contested or contingent claim cannot be reached prior to the expiration of the period of limitations for claims for refund, the estate may file a protective claim for refund to preserve its right to claim a deduction under section 2053(a).

The proposed regulations -- which appeared in the April 23, 2007 Federal Register -- can be found here.

One fundamental question in estate administration is, who pays the debts and expenses? This may seem like a simple question, but given the various different kinds of assets -- some in the decedent's own name, possibly others in trust or in other non-probate forms -- it can get tricky.

The general rule in Illinois is for "equitable apportionment." This (according to one court case) is "the term... used to describe the process of distributing the burden of certain estate expenses among those beneficiaries in the same proportion as they respectively cause such expenses to be incurred." In other words, if you inherit 10% of a decedent's property, and the decedent's estate is subject to estate tax, you are responsible for paying 10% of that tax. And this payment must be made regardless of the nature of the property you inherited.

There's an exception to that general rule, which is that a decedent may specifically direct from which assets taxes should be paid. The application of this exception is addressed in Malik v. Lashkariya, a First District appellate court case. The opinion (available as a pdf here) was issued on December 26 of last year. In Malik, the decedent's Will said "all taxes shall be paid by my estate." But does "estate" here mean "my probate estate," or does it mean "my entire estate, probate and non-probate"? The court decided that the decedent meant "my probate estate." In other words, those who inherited the decedent's non-probate assets were not required to pay a proportionate share of taxes.

I'm a little torn about this case. On the one hand, the language included in the Will obviously seems to apply only to probate property. On the other hand, did the decedent's attorney really explain how taxes would be paid from the decedent's assets, and did the decedent understand the import of this language? I hope so.

For estate tax purposes, the biggest question regarding a power of appointment is whether it's a general power or a special power (more terminology!).

Why is the general vs. special distinction relevant? Because of §2041 of the Internal Revenue Code, which governs whether a power of appointment over a trust should mean that the trust is included in the power holder's estate for estate tax purposes at the power holder's death. Section 2041(a) says that...

The value of the gross estate shall include the value of all property... [t]o the extent of any property with respect to which the decedent has at the time of his death a general power of appointment....

So what is a general power of appointment? It's defined in §2041(b)(1) as "a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate." I call these people or entities the "Big 4" -- if your power of appointment can be exercised in favor of any one or more of the Big 4, then the trust property is included in your gross estate for estate tax purposes. And note that this is true regardless of whether you actually exercised the power. And, of course, any power of appointment that isn't a general power is a special power, and isn't included in your gross estate for estate tax purposes.

The above is an oversimplification of the estate tax rules. For a little more detail on general vs. specific powers, you may want to look at this article.

Apportionment relates to how (or from which property) estate taxes are paid.  A person with a taxable estate may die with property in various forms -- in her own name (that's probate property), in trust (non-probate), with beneficiary designations (non-probate), etc.

The question then becomes, how do we figure out which assets are used to pay the tax? The answer to this question may have a great impact on what the beneficiaries receive.  If all taxes are paid only from probate property, then beneficiaries under my Will wind up paying my estate tax (and having their bequests reduced).  That's why the general rule in Illinois is for courts to apply the concept of "equitable apportionment," which permits taxes to be apportioned among probate AND non-probate assets.  That strikes me as fair.

That being said, a testator is free to override the concept of equitable apportionment in his or her estate planning documents.  For instance, a Will might say something like this:

All estate and succession taxes, including interest and penalties payable by reason of my death, shall be paid out of and be charged against the principal of my residuary estate, without reimbursement from any person.

That language clearly indicates that estate taxes are paid from probate assets (and from the residue of the probate estate) only. 

I see two problems raised by the above language:

1. Why would you want to do this?

2. What if the estate taxes exceed the value of the residue?

The recent case of Estate of Williams (from the 3rd District Court of Appeals) tries to address question #2.  In that case, the court found as follows:

... [W]here a testator directs through her will that all obligations be paid from the residue yet the will is silent as to the source of funds in the case that the residue is insufficient to cover such liabilities, equitable apportionment must be applied if it is later discovered that the residue is in fact insufficient.  In such a case, the testator has failed to clearly express her intent as to who should be responsible for the additional payments and the will is ambiguous on this issue.  The application of the doctrine of equitable apportionment is therefore proper.

In case you missed it, the You and Yours Blawg recently posted about a nice Washington Post opinion piece called "Tax Inheritance, Not Death."   

Like Deirdre R. Wheatley-Liss, who runs the You and Yours Blawg, I take issue with the authors' statement that "opponents of estate tax repeal have fallen back on a divisive class-warfare approach. The estate tax affects fewer than two percent of the richest Americans. Thus, they argue, the other ninety-eight percent of the population should oppose repeal." 

I'm sure some anti-repeal folks might be trying the class-warfare approach, but others are surely responding to the lies of the pro-repealers, who often try to convince Joe and Jane Middle Class America that their estates will be subject to estate tax.  If individuals in favor of repeal want to write articles with titles like "Estate tax hurts black Americans," then they shouldn't take offense when people opposed to repeal calculate (in this article) that the actual number of black Americans hurt by the estate tax this year is... 59 (dropping to 33 in 2009).

Last week I posted a link to a satirical article about the estate tax.  In my post, I assumed that Clark Allison -- who had posted about how Karl Marx would have been in favor of the estate tax -- was also being satirical.  According to Mr. Allison, this was not the case.

It might surprise Mr. Allison to learn that I too am philosophically against the estate tax.  I see no reason why the government should try to topple family dynasties when (1) such social engineering rarely if ever works, and (2) family dynasties (usually via incompetent and/or lazy members of following generations) do such a good job of toppling themselves.  (Note that, if you run through the profiles of the wealthy families who are most actively lobbying for repeal -- like the ones listed in this pdf report on "The Campaign of the Super Wealthy to Kill the Estate Tax" -- you won't run across many first generation business creators.)

My philosophical objection to the estate tax is tempered by two interrelated points:

1. As The New York Times again pointed out in yesterday's magazine, under the current administration,  the budget deficit has risen from about $5.7 trillion (as of September 7, 2000) to more than $8.3 trillion today -- and projections indicate it will be about $12.8 trillion in a decade. 

I've read where some people believe the estate tax is immoral.  I guess morality is relative, because I tend to think that saddling my daughter and her children and grandchildren with increasingly enormous amounts of debt is a fairly huge moral failing. 

Mr. Allison states that "Like with all tax issues, it comes down to this: Who do you trust to make better use of your money - you and your family or the government?" But that's non-responsive -- this administration has already spent a ton of my money.  In fact, they've spent a ton of my money, and a ton of money they don't even have.  The question now is, who is going to pay for all of that spending?  "Repeal the estate tax" isn't an answer to that question.

2. To continue from above, if you want to repeal the estate tax, you have to show either that (a) doing so will not result in a loss of revenues or (b) the loss in revenues will be made up elsewhere.  I don't believe I've heard many people address either of these points.  Instead I've heard:

a. "Our polling says Americans hate the 'death tax.'"  Never mind the fact that pro-repeal folks have consistently distorted what the "death tax" is (even inventing a new name for it!) and who it affects when they do their polling.

b. "Farmers and small businesspeople are devastated by the tax!"  Of course, no one can locate any specific farmers who have been devastated. 

c. "The estate tax is bad because it affects too many people."  And yet the latest estimate is that about 13,000 estates will pay federal estate tax this year.

d. "The estate tax is bad because it affects too few people -- it just doesn't generate revenue!"  What about the huge predicted increases in estate tax revenues in the coming years? 

e. "The estate tax is bad because it causes people to want to make less money."  A tax that almost no one understands, that affects very few estates, is acting as some huge deterrent to the accumulation of wealth?  Is there evidence of any real, specific cases where this actually happened?  Do we have significantly fewer wealthy people now than we did before the estate tax was enacted?

f. "The estate tax amounts to double taxation!"  Except on all of that property that hasn't yet been subject to tax even once, of course.

g. "Look at all of the countries that don't have or have gotten rid of the tax."  Remember the Republican outrage over the Supreme Court's consideration of foreign law in Roper v. Simmons?  Evidently it has dissipated -- WWJD has been replaced with WWCD (What Would China Do?).

h. "Karl Marx liked the estate tax."  Yikes!  I don't even know what to say to that.

As I've stated previously, this isn't really an issue that impacts me professionally -- I did a lot of estate tax work back in my associate days, but about 1% (or fewer) of my current clients will have any sort of taxable estate.  I spend most of my days handling probate and probate litigation, or doing simple estate plans.

On a personal basis, though -- as a taxpayer and a citizen -- I'm just tired of the pro-repeal "arguments." If you don't like the estate tax because you think it's unfair to the rich, and you want to spread the revenue lost by the tax over the general population (by raising income tax rates, via a carryover basis regime, or something else), then just say that.  I'll probably agree with you.  But I'm sick of hearing ridiculous arguments (and even some outright lies) trotted out in an attempt to convince the American public of a course of action.  If we've learned anything over the past 4 years, it's that that kind of thing doesn't work.

Clark Allison's wonderfully satirical post on how Karl Marx would've loved the estate tax (it was supposed to be satirical, wasn't it?) now has some company -- check out The Swift Report's post entitled "'Death Tax' More Deadly than Gout, Polo Injuries Combined". My favorite part (besides the pictures):

In a recent survey, 43% of Americans said that they feared the death tax more than activist judges, Iranian President Mahmoud Ahmadinejad, gay migrants or fast-growing molds. Only an accidental plunge from a cruise ship or unwanted sexual advances from a female elementary school teacher incited greater fear among those surveyed. Sixty-four percent of respondents said they were "terrified" or "very anxious" about encountering misadventure on the high seas, while 57% said they worried about being hit on by a "hot" educator.

Deirdre R. Wheatley-Liss, the author of the You and Yours Blawg, has a great new post entitled "Beware the Snare - State Estate Tax on the Rise."  This is a stealth issue, one that's sure to cause problems but is not getting much publicity from the mainstream media.

I'll be out of the office for Christmas through January 3rd.  Happy Holidays to all of my readers!

This page includes helpful links to Illinois estate and generation skipping tax forms and instructions.  There's even an estate tax calculator (here).

Thanks to John Ahern on the ISBA Transactional Law Listserv for pointing this out.

Pity those "poor" folks pushing for repeal of the estate tax.  They're up against a wall (so to speak), as Hurricane Katrina forces the nation to really look at and think about poverty.  The pro-repeal folks' solution?  Find someone who (1) perished in the Hurricane and (2) is subject to the estate tax. 

So far the search has been unsuccessful.  Time.com has the story here.

I don't know if it's available online, but yesterday's Wall Street Journal had an editorial about estate tax repeal.  The editorial starts by saying that Senate Majority Leader Bill Frist has decided to delay a vote on repeal until September, and then launches into full attack mode against the estate tax. 

A few comments:

1. The Journal has a big problem with the revenue loss projections calculated by "the unelected number crunchers at the Joint Committee on Taxation (JCT)." 

a. You'll note the use of the word "unelected" here.  The Journal's idea is not that JCT employees should be elected, but rather to suggest (as the Journal does later) that JCT employees be replaced with "a staff whose predictions are at least in the same zip code of economic reality."  In other words, a staff whose predictions are approved of by the Journal.  Of course, such a staff also wouldn't be elected, but that's not really the point.  What's an activist judge?  A judge who rules in a way that I dislike.  What's an unelected government worker?  A government worker who does something (in this case, makes a calculation) that I dislike. 

b. I agree that it's important for us to have a clear picture of the revenue impact of estate tax repeal, but I differ with the Journal in how we obtain this picture.  They cite a study by an economist from the American Family Business Institute, to the effect that the JCT tends to overstate revenue loss from estate tax repeal, but I have to look at AFBI's website (aka "nodeathtax.org"), and wonder whether the group's agenda might have a little something to do with its economist's conclusion.  The Journal says the JCT ignores the impact of "faster economic growth, more savings, more job creation, and more capital investment that can be anticipated" by repeal of the estate tax, yet I wonder why the Journal makes no attempt to quantify this impact.  Are we simply to assume that the estate tax repeal will result in minimal revenue loss (or even a revenue gain) because the Journal says so?

2. The Journal states that there is "overwhelming support for repeal among voters," but I have to ask the basis for this opinion.  Were these polls also conducted by the AFBI?  It seems fairly easy to manipulate responses to an issue most people know very little about.  Will people dislike the estate tax more if I call it "the death tax"?  What if I misrepresent the number of Americans who will be subject to the tax?  On a similar note, the Journal says estate tax repeal "helped to defeat Tom Daschle in South Dakota last year."  However, when I look for evidence of taxable estates in South Dakota, all I can find is this study by AALU (the Association for Advanced Life Underwriting), which states (at the bottom of page 43) that about 74 estates per year will be subject to the tax from 2006-2020.  Did the voters of South Dakota really vote Tom Daschle out of office because he opposed the repeal of a tax that may affect 74 South Dakota estates per year? 

3. The Journal's position on capital gains strikes me as fairly inconsistent (remember that estate tax repeal would also repeal the current "step-up in basis" regime in large part).  In one paragraph, the Journal is criticizing the JCT for ignoring the revenue effect of the capital gains provision in the repeal bill.  Yet three paragraphs later the Journal argues that "[d]eath should not be a taxable event."  It seems to me that this latter position ignores the economic reality of the capital gains provision, namely that death will still be a taxable event for those who most need the money they are inheriting (i.e. most everyone but the super-wealthy). 

4. Near the end of the editorial, the Journal pulls out what appears to be the argument du jour against the estate tax: other countries don't have it.  Remember when the Journal (here) got up in arms over Justice Kennedy's referencing of international law in the juvenile death penalty case of Roper v. Simmons?  Back then, the Journal accused Justice Kennedy of being selective in his use of international law.  But isn't the Journal doing the exact same thing here?  More to the point, is it really relevant to use a list of countries without an estate tax, taken out of context with respect to things like budget deficits and income tax rates, in order to argue for repeal?

5. To me, the biggest question involving estate tax repeal focuses on whether those opposed to repeal will start using the same aggressive tactics as the pro-repeal crowd.  Yes, the estate tax affects a decedent's ability to give away property at death.  But can't it also be said to tax a less-protected type of income (namely, income that you never earned in the first place)?  If the pro-repeal crowd uses family farmers as their poster children, will the anti-repeal crowd begin to employ Paris Hilton and other spoiled heirs for the same purpose?