February 15, 2010

Scott Lee Cohen, the Estate Tax, and Traditional Media Failure

Two stories:

1. On February 2nd, a guy named Scott Lee Cohen won the Illinois Democratic primary for lieutenant governor. You probably know the rest -- this guy had a whoooooole bunch of skeletons in his closet. Cohen, under a lot of pressure, resigned after being made the butt of many a joke (and, if possible, making Illinois politics look even more ridiculous than it already did).

2. The Wall Street Journal yesterday published a story entitled "Why No Estate Tax Could Be A Killer." (A link is here.)

Is there a connection between these two stories? Yes, and that connection can be described in six words: THE FAILURE OF THE TRADITIONAL MEDIA.

As much as I make fun of Illinois Democrats over the Cohen affair, the fact is that his history -- steroid use and allegations of violent behavior -- was well-known to the Chicago media. They just chose not to report this history to Illinois voters, because... well... I guess they aren't very good at their jobs.

Ditto with the estate tax and the above WSJ article. Surprise surprise: having no estate tax (but a capital gains tax) will actually make even more estates subject to federal tax at death. You didn't know that? Talk to any estate planning attorney or accountant, and you would. Yet the article acts like this is some big, nasty surprise.

Here's a great quote from the article:

Under last year's law, estates up to $3.5 million, or $7 million for married couples, were exempt from federal tax. This year that law has been replaced by a fiendishly complex levy raising taxes on the assets of those with little as $1.3 million. It will affect the heirs of at least 50,000 U.S. taxpayers who die this year, whereas the old law affected only about 15,000 estates a year, according to the Tax Policy Center.

The article goes on to include this jaw-dropping statement: "This little-understood facet of the current law was enacted as part of a deal brokered in 2001...."

Wait -- so the media has known about this "little-understood facet of the current law" since 2001, but the Wall Street Journal is acting as though it's a huge surprise? On February 13th, 2010? Where has the Wall Street Journal been during the last nine years?

By reference, here's a section from my blog post dated June 3, 2005 on estate tax repeal:

... [I]f the death figures for 2010 are the same as in 2009, then we're trading an estate tax in 7,500 estates for a potential capital gains tax in the 56,300+ estates worth more than $1.3 million. The main question: How many of those 56,300+ estates will incur a capital gains "problem" (either a tax, or the need to expend substantial resources to compute the basis of inherited assets)?

Gosh, what an interesting question... for 2005. But again I ask, where was the Wall Street Journal and the rest of the traditional media?

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January 13, 2010

5 Things You Need to Know About the Estate Tax in 2010: #5 (2011 and on)

So where do we go from here? It's hard to know. If we're going to think in terms of what might happen, then we have to consider the following three possibilities:

#1: No action by Congress (no federal estate tax in 2010, but federal estate tax automatically comes back with a $1 million exemption in 2011 and thereafter);

#2: Prospective action by Congress (federal estate tax re-enacted for 2011 and thereafter -- and maybe for the rest of 2010 as well); and

#3: Retroactive action by Congress (so federal estate tax applies in all cases, even for 2010 -- obviously there's the retroactivity problem here).

If I had to guess, I'd say that #2 seems like the best possibility (maybe I should, but I'm not even including total repeal as a possibility). But even if that's the case, we have no idea what the re-enacted federal estate tax will look like. Will the exemption amount be $3.5 million? Or higher? Or lower?

The big question is, should any of this cause you to take action with respect to your documents right now? And my answer -- which I hate to give -- is, "I don't know." In a perfect world, you wait a month or so, we get some clarity on the estate tax, and then you have your documents updated. But what if that clarity doesn't come in a month or so (or ever)? Or what if you die during this period of uncertainty? Ultimately, I think everyone has to make the call on their own, depending on their situation and risk tolerance. The shameful part is that the very rich can afford to change their documents now, and then change them again and again. Can anyone else afford to do that?

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January 12, 2010

5 Things You Need to Know About the Estate Tax in 2010: #4 (State Death Taxes)

Short post today, both because I've covered this issue fairly recently and because I'm dealing with a burst pipe in my basement.

The fact that there is currently no federal estate tax does NOT mean there are no estate taxes on the state level. The chart in this article is a must-see -- it lists all of the states with an estate or inheritance tax (or both), along with exemption amounts and rates.

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January 11, 2010

5 Things You Need to Know About the Estate Tax in 2010: #3 (Trust Problems)

An effective estate plan should be flexible enough to accommodate changes in circumstances -- maybe not every change, but many of them. For instance, instead of specifically referencing the estate tax exemption amount when drafted, most well-drafted documents contain a formula based on the exemption amount in effect when the decedent dies. But does your estate plan account for the possibility that there will be NO federal estate tax when you die?

A lot of married couples have what's known as an A-B plan. If one spouse dies, two trusts are created for the survivor:

(A) Family Trust: usually containing an amount equal to the federal estate tax exemption amount at the death of the first to die

(B) Marital Trust: containing everything else owned by the first to die

The goal is no federal estate tax at the death of the first to die. The Family Trust is by definition exempt from federal estate tax, and the Marital Trust qualifies for the marital deduction (so is not subject to federal estate tax). The surviving spouse is the only beneficiary of the Marital Trust; the Family Trust's beneficiaries might be just the surviving spouse, the surviving spouse and kids of first to die, or just the kids of the first to die.

But what happens if there's no estate tax whatsoever? If the above language is used, the Family Trust isn't created (no exemption = no federal estate tax = no Family Trust). So there's just a Marital Trust.

Alternatively, you could draft a trust whereby the Marital Trust contains the "smallest amount that will result in no federal estate tax," and the Family Trust contains everything else. Under that scenario, no Marital Trust is created (the "smallest amount" would be $0). So there's just a Family Trust.

So what's the problem? There may not be one, if we're talking about a traditional nuclear family where the spouse is also the sole beneficiary of the Family Trust. But what if both spouses have children from a prior marriage? In that case, we may have a Family Trust of which the surviving spouse isn't the sole beneficiary (or not a beneficiary at all). And we run the risk, under the above scenarios, of either shortchanging the surviving spouse (no Marital Trust created) or shortchanging the kids (no Family Trust created).

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January 8, 2010

5 Things You Need to Know About the Estate Tax in 2010: #2 (Retroactivity)

Perhaps I am getting ahead of myself -- I have been assuming that we will not have a federal estate tax for 2010. It's possible that Congress might get its act together and actually pass an estate tax bill in 2010 that applies for both 2010 and the future. This is what I've always thought would happen (naive me) -- maybe permanently setting the exemption at $3.5 million.

But this raises the question of what happens with individuals who die in 2010 before the new law, reinstating the estate tax, passes. Could such a law be made retroactive?

Probably. The Supreme Court previously stated (in Carlton v. United States, 512 U.S. 24 (1994)) that a retroactive law is valid under the Constitution if (1) the government shows that the statute has a rational legislative purpose and is not arbitrary and irrational; and (2) the period of retroactivity is "modest." (In Carlton, the "modest" period of retroactivity was 14 months.)

That being said, there is some caselaw indicating that the result might be different if the Supreme Court views this law (estate tax reboot? estate tax 2.0?) as a "wholly new" tax or as simply fixing something in an existing tax (the Carlton case mentioned above involved closing an estate tax loophole).

You may want to take a look at this article on Gideon Alpert's excellent Gay Couples Law Blog for a bit more information on this topic.

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January 7, 2010

5 Things You Need to Know About the Estate Tax in 2010: #1 (Capital Gains)

Up through 2009 (and starting again in 2011, assuming the law isn't changed), there was a federal estate tax. That was and will be the bad part, at least for people who owed or will owe tax.

The good part was that, in exchange for potentially being subject to the estate tax, you got a "step-up" in basis. Essentially, when an individual died, his or her assets took as their basis for capital gains purposes their fair market value as of the date of death. So, to consider an example,...

Mom buys a bunch of stock in Company X, starting in 1950 and continuing to her death. The actual cost basis for her purchases was $15,000.

Mom dies, and her Company X stock is work $500,000.

Mom's three kids are left the Company X stock under Mom's Will.

What is the basis in the Company X stock? During a year in which there's an estate tax, that's easy: it's $500,000. So, if the kids sell the stock after Mom's death, they pay capital gains on the difference between the sale price and $500,000.

But how is this handled in 2010? There are three main rules:

1. Instead of a step-up in basis, we have a carryover basis regime. So the basis in Company X would be $15,000. But...

2. There is still a step-up in basis for $1.3 million of assets passing to beneficiaries who aren't the decedent's spouse. And...

3. There is a step-up in basis for $3 million of assets passing to the decedent's spouse.

The major problem with a carryover basis regime is that, in many cases, it is difficult or impossible to calculate the decedent's basis in his or her property. (From what I have read, this was the problem when carryover basis was briefly made the law, back in 1976.) And I worry that the biggest result of this change in the law will be full employment for America's forensic accountants.

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January 6, 2010

5 Things You Need to Know About the Estate Tax in 2010: Introduction

I'm going to be starting a series of posts entitled "5 Things You Need to Know About the Estate Tax in 2010." The first post should be up tomorrow, but before that, I need to vent.

I've put off writing about this because (1) I get angry just thinking about it and (2) I was hoping against hope that something would be changed by the end of 2009 (it wasn't, obviously). So here we are.

There's an idea being floated by some political commentators that Congress is "broken" because it can't pass health care reform. I don't buy that, but of course I, as a conservative, stand athwart history (and athwart expensive, invasive and probably unconstitutional legislation that can never be repealed) yelling "stop." Health care reform is a huge, (overly-)complicated deal, and it SHOULD be difficult to make huge changes to the way our nation works.

The estate tax, on the other hand? I got nothing. In June of 2001, major changes were enacted to the way in which the federal estate tax operates. Because of a so-called "sunset provision," these changes make no sense:

2002-2009: estate tax exemption increases, estate tax rates fall

2010: no estate tax

2011: estate tax exemption and rates back to what they would have been in 2001

What in the world? I know -- it's ridiculous. But here's the thing: we've KNOWN about this ridiculous result ever since June of 2001. And nobody in Congress has done anything to fix it. So here we are, with a ridiculous, unworkable estate tax law and rampant uncertainty about whether it will ever be fixed.

OK, that's enough ranting -- in this series of posts I'll be discussing things like:

-How carry-over basis works

-Could Congress impose an estate tax for 2010 retroactively?

-How estate tax repeal affects Family Trust and Marital Trust planning

-The state estate tax problem

-Planning for 2011 and on

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November 11, 2009

The QTIP, Part 3

(This is the third and final post in a series. Links: part 1 and part 2.)

As I said at the end of my post in part 2, we have a problem when the federal exemption amount and the Illinois exemption amount are different. That is the case right now, where the federal exemption amount is $3.5 million and the Illinois exemption amount is $2 million. To take the example I referenced (of a $5 million estate):

$3.5 million to family trust (no estate tax on this, ever, because it equals the exemption amount)

$1.5 million to marital trust (no estate tax on this because of marital deduction; will be taxable in surviving spouse's estate)

But if you set up your trusts like this, then you will owe Illinois estate tax, since $3.5 million exceeds the Illinois exclusion amount ($2 million).

The solution? The Illinois QTIP, which was added by Public Act 96-0789, which is here. In a sense, this allows you to bifurcate the Family Trust, so that we have three pots instead of two:

Family Trust #1: Holding $2 million – free from federal and Illinois estate tax forever

Family Trust #2: Holding $1.5 million – free from federal estate tax forever; free from Illinois estate tax at the death of the first spouse (but includable in the estate of the second spouse for Illinois estate tax purposes)

Marital Trust: Holding $1.5 million – free from federal and Illinois estate tax at the death of the first spouse (but includable in the estate of the estate of the second spouse for federal and Illinois estate tax purposes).

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November 5, 2009

State Death Taxes

Ordinarily I hate using the phrase "death taxes," but I'll make an exception here because:

1. "State estate taxes" is a horrible phrase to utter; and

2. "State estate taxes" really isn't accurate, since some states have an inheritance tax (in place of or in addition to an estate tax).

Anywho, over the weekend the Wall Street Journal had a nice article by Laura Sanders entitled "State Death Taxes Are the Latest Worry." Here is the link. (By the way, unless you want to be depressed about the future of civilization, don't read the comments.)

The issue relates a bit to what I discussed in my last post about the QTIP (here -- oh, and part 3 of that series should be up next week). If the federal exemption amount is set at $3.5 million, very very few estates will need to pay the federal estate tax (according to the article, at the current level only 5,500 estates per year are subject to tax).

But if you have a state that imposes an estate or inheritance tax, they may do so at a much lower exemption amount. Illinois is at $2 million. Some states are even lower than Illinois -- $338,333 for Ohio, and $1 million for New York and many other states.

We then get two "problems":

1. Will states compete for residents by lowering their inheritance/estate tax rates? I don't actually think this is a problem (which is why I put that word in quotes above) -- the libertarian in me thinks that's just good, healthy competition. And I have to think that, for most people, non-death tax considerations are king. You literally couldn't pay me to live in most of the states with no death taxes.

2. The bigger question: How do we deal with situations where a decedent has ties to more than one state, and the states fight over the decedent's assets? The article mentions the estate of John Dorrance (described as "Campbell Soup magnate") -- New Jersey and Pennsylvania both said he was domiciled in their state, and his estate wound up having to pay taxes in both places. Yikes!

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October 26, 2009

The QTIP, Part 2

Let me add a little bit of a wrinkle to the discussion in my last post, by introducing the concept of the state estate tax. This is extremely relevant to the new Illinois QTIP statute.

Yes, most states (including Illinois) have an estate tax. But, in the past, this tax was hard to spot. Why? Because, on the federal estate tax return, you would get something called a "state death tax credit" (essentially, a credit for state estate taxes paid). And most states (again, including Illinois) had what was known as a "pick-up tax" or "sponge tax," meaning that their estate tax was equal to the state death tax credit. That made the state estate tax look almost invisible. If you owe a federal estate tax of $6 million, that's what you pay in total, but instead of all $6 million going to the federal government, a portion (equal to the state death tax credit) goes to Illinois.

Then things got even trickier. In 2001, legislation was passed raising the (federal) exemption amount over time. (Allow me to sound old: when I started practicing law, in 1996, the exemption amount was $600,000. In 2001 it was $675,000. Now it's $3.5 million.) That meant less estate tax revenue for the states with a sponge tax. To makes matters even worse, the state death tax credit was phased out. These two changes meant much less estate tax revenue for most states, so most of them hit upon a solution: change their estate tax from a pick-up tax to a real, bona fide estate tax.

That's what Illinois did, but the state set its exemption amount (also called the "exclusion amount") at $2 million instead of $3.5 million. You can imagine the problem that that causes -- most estate plans are drafted to minimize the federal estate tax. So, as I explained previously, if you are married and have a $5 million estate, it's easy to pay no estate tax upon your death:

$3.5 million to family trust (no estate tax on this, ever, because it equals the exemption amount)
$1.5 million to marital trust (no estate tax on this because of marital deduction; will be taxable in surviving spouse's estate)

But if you set up your trusts like this, then you will owe Illinois estate tax, since $3.5 million exceeds the Illinois exclusion amount.

Next time: the Illinois QTIP.

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October 26, 2009

The QTIP, Part 1

I'd like to spend a few posts talking about QTIPs. No, I'm not talking about the cotton swabs you aren't supposed to stick in your ear but do. Nor am I talking about the rapper from A Tribe Called Quest who is best known for his guest spot on Deee-Lite's single "Groove Is In The Heart." Rather, I'm talking about Qualified Terminable Interest Property.

To talk about QTIPs in this last sense, we need to talk about how the estate tax works. I'll try to be brief, and simplify (maybe over-simplify). The idea of the estate tax is, roughly, as follows:

1. There's no estate tax on property left to a surviving spouse.

2. There's no estate tax on property left to charity.

3. There's no estate tax on property left to anyone else, unless its value exceeds what we'll call the "exemption amount." (Currently it's $3.5 million.)

In most cases involving married couples, the goal is to defer the payment of estate tax until the death of the surviving spouse. This can be done in a couple of ways. One way is by setting up (at the death of the first spouse to die) two trusts:

A Family Trust or Exemption Amount Trust, holding property equal in value to the exemption amount. This trust will NEVER be subject to estate tax.

A Marital Trust, holding the rest of the property of the first to die. This trust will be subject to estate tax in the estate of the surviving spouse.

If you draft the main trust document correctly, you create a situation where no estate tax will be due when the first spouse dies, no matter how much property the first spouse to die owns, and no matter what the exemption amount at the time of death. For instance: if the exemption amount is $3 million and I die with $100 million, then the Family Trust gets $3 million (no estate tax, ever) and the Marital Trust gets the remaining $97 million (no estate tax now, but subject to estate tax in the surviving spouse's estate).

Alternatively, you can just create one trust (let's call it the "Family Trust"), but then -- once you determine the exemption amount and the value of the property of the first to die -- you make what's known as a "QTIP election." That is, you elect to treat part of the trust (the part over and above the exemption amount) as "qualified terminable interest property," for which you receive a marital deduction. So, again, no estate tax due at the death of the first to die.

One cite: "qualified terminable interest property" is defined in IRC Section 2056(b)(7).

Next time: what's an Illinois QTIP election?

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April 9, 2009

Wall Street Journal Estate Tax Editorial

I’ve said it before, I’ll say it again: I’m opposed to the estate tax, and think we should get rid of it. But – as I’ve also said before and will say again – I don’t understand why opponents of the estate tax have to engage in bald-faced lies in order to make their point.

Take today’s Wall Street Journal editorial, for instance. It reiterates two of the most popular lies perpetuated by anti-estate tax folks:

1. “We’ve long argued that the fairest [estate] tax rate is zero, because the money was already taxed when it was earned.” That is, um, a lie. A LOT of assets have never been subject to tax prior to death (for instance, retirement benefits in a 401(k) account, or unrealized appreciation). The Journal acknowledges this fact in the very next sentence: “Assets, such as stocks or property, in estates that have appreciated in value over time should be taxed at the capital gains rate of 15% in the year of the sale.” That’s some classic double-speak: all estate assets have already been taxed, but if they haven’t (wink wink), they should be taxed at a very low rate.

2. That the estate tax harms small businesses and farms, who are “looted” by the tax. Those people, quite frankly, do not exist. Opponents of the tax mention small businesses and farms all the time, but they are never able to produce a family that was forced to liquidate its farm or business because of the tax. Funny enough, these are the same people who pushed to add Section 6166 to the Internal Revenue Code (which allows small businesses or farms to pay estate tax over a number of years at a very low interest rate), and then complained that Section 6166 wasn’t being used. No duh. To make its argument here, the Journal depends on Senator Blanche Lincoln of Arkansas, who evidently spoke with great eloquence about the nefarious effect of the estate tax on the good people of Arkansas. His words carried much weight with the Journal, whose editorial board has presumably never actually been to Arkansas or met anyone from that state.

This IRS page includes filing figures for the estate tax. One of the spreadsheets sorts by state and shows, for the most recent year (2007), that a total of 82(!) Arkansas estates paid estate tax. The average federal estate tax paid was $81,343. So the tax paid totals $6,670,126 (82 x 81343). So that’s what Senator Lincoln and the Journal are arguing about, in this case. Less than $7 million paid by fewer than 100 people (and note that this figure comes from 2007, when the estate tax exemption was $2 million -– it’s now $3.5 million).

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March 19, 2009

Illinois Estate Tax Case

This is clever -- the Illinois Estate and Generation-Skipping Transfer Tax Act (35 ILCS 405/) requires the payment of tax equal to the "state tax credit." That's a defined term in Section 2(a) of the Act:

"State tax credit" means:
(a) For persons dying on or after January 1, 2003 and through December 31, 2005, an amount equal to the full credit calculable under Section 2011 or Section 2604 of the Internal Revenue Code as the credit would have been computed and allowed under the Internal Revenue Code as in effect on December 31, 2001....

The estate in this First District Court of Appeals case argued that no Illinois estate tax was due because it did not claim a credit under Section 2011 or Section 2604. Since no credit was "allowed," the state tax credit (and therefore, the Illinois estate tax) should be... zero. The court disagreed.

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January 13, 2009

Obama and the Estate Tax

If you haven't read it, today's Wall Street Journal leads off with an article about Obama and the estate tax. Actually, it's about more than just what the President-elect plans to do regarding the tax -- there's also some interesting history about the rise and fall of the anti-estate tax forces, and the battle between the rich anti-estate tax folks and the REALLY rich anti-estate tax folks. The article is here.

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December 8, 2008

Illinois Bar Journal Resources

If you are an Illinois estate planning or probate attorney, you may want to check out this month's Illinois Bar Journal. A few things it tackles:

-how to use gifts to reduce Illinois estate taxes;

-FDIC limits for accounts owned by a living trust; and

-whether an adopted child can inherit from a biological parent.

Here is a link, although you need to be a member of the ISBA to see most content.

October 21, 2008

Other Presidential Candidates on the Estate Tax

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.

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October 16, 2008

More on McCain, Obama and the Estate Tax

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.

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July 23, 2008

McCain and Obama Tax Policies

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

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December 11, 2007

Whoopi Goldberg, The Wall Street Journal, and Estate Tax Lies

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.

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October 27, 2007

The Economist on "Death Taxes"

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").

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