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Posted at 11:24 AM ET, 12/15/2010

An estate tax primer

By Ezra Klein

EstateTax_EstateTaxParamete.jpgThe estate tax is going to dominate the final arguments over the tax deal, so it's worth quickly running through what it is and how much the various plans will cost us.

The basic insight behind the estate tax is that wealth concentration is a problem. That was true in 1916, when the tax was enacted, and it's true today, when it's being neutered. As Ray Madoff explains, the going theory came from Louis Brandeis, who said, “We can have concentrated wealth in the hands of a few or we can have democracy, but we can’t have both.” Andrew Carnegie himself testified in favor the estate tax's creation.

The way it works is simple enough. There's an exemption level beneath which estates are not taxed, and a tax rate that applies to every dollar the estate is worth above the exemption. In 2001, we had a $675,000 exemption and a 55 percent tax rate. So an estate worth $700,000 would take a 55 percent tax on that final $25,000. The estate tax's levels, however, have been changing because the Bush tax cuts -- as you can see in the table on the right -- have been phasing it out. In 2002, it was $1 million, and 50 percent. By 2009, the exemption was up to $3.5 million, and the rate down to 45 percent. And in 2010, the estate tax was repealed.

But not for long. If no action is taken, it returns in 2011 with an exemption of $1 million and a rate of 55 percent. If that seems like weird tax policy -- a single year in which death carried a huge tax break -- it is. But it was never about tax policy. It was a political strategy: Republicans wagered that Democrats wouldn't be able to bring the estate tax back after it had expired. Public opinion would be against them, and it would be backed by a massive amount of money from the nation's richest residents.

So far, it looks like they were right.

The dominant alternative to the estate tax's return -- which had support from both Republicans and, sadly, Democrats -- was the Lincoln-Kyl bill: A $5 million exemption with a 35 percent rate. This is the language that has been included in the tax deal.

So how much does this cost? With a $1 million exemption and a 55 percent rate -- in other words, what will happen if we do nothing -- the estate tax would raise about $700 billion over the next 10 years. The Lincoln-Kyl version would raise less than $300 billion. And the compromise most Democrats have coalesced around -- which was the 2009 level, with a $3.5 million exemption and a 45 percent rate -- would've brought in a bit less than $400 billion.

It's important to keep in mind the cramped space of this debate: If the tax goes back to its scheduled levels, it'll tax 2 percent of estates, If the Lincoln-Kyl levels are put in place, it'll tax 0.25 percent of estates. But the difference between the hundreds of billions the tax could raise and the miniscule number of estates it would affect explains the immense energy Republicans and some Democrats (notably Blanche Lincoln, who has traditionally raked in campaign money from the Walton family) give to the issue. In a report called "Spending Millions to Save Billions," Public Citizen and United for a Fair Economy estimated that a handful of the country's richest families had spent more than $400 million lobbying for the tax's repeal -- and of they were successful, they stood to save more than $70 billion.

For the rich, fighting the estate tax is simple a good investment. And it looks like it's paying off.

Update: It's worth clarifying that the tax gets levied on the estate, not the heir. Technically, the heir pays nothing, and the tax needs to be dealt with before the estate is transferred.

Numbers and table credit: The Center on Budget and Policy Priorities.

By Ezra Klein  | December 15, 2010; 11:24 AM ET
Categories:  Taxes  
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Comments

The issue here, and in countless other places (agriculture, energy subsidies, etc.), is that their is only one 'special interest' involved. When you have a special interest on one side (and their standard force of useful idiots), and only common sense and the popular opinion of the American people on the other, you know who is going to come out on top every time.

If they want this dealt with, they need to get someone relevant on the side of re-establishing the tax. this could be done pretty easily by, say, declaring that a portion of the revenues would be a dedicated revenue stream for subsidizing physician malpractice insurance costs (lawyers, doctors, and insurers lobbying on the same side? unstoppable.) or somesuch.

Posted by: eggnogfool | December 15, 2010 12:14 PM | Report abuse

A $3.5 million exemption seems reasonable though. It assures that the vast majority of people won't have to liquidate inherited assets just to pay the taxes on them. When it comes to things like homes, land and art that seems fair to me. Somebody shouldn't have to give up a precious or personally significant asset just for tax purposes.

Posted by: destor23 | December 15, 2010 12:20 PM | Report abuse

Can you talk about small businesses and how they are effected?

small business is the only line of argument that keeps this from being naked crony capitalism.

My guess is that small businesses aren't effected to greatly by estate taxes...i just want to have the numbers to back that up

Posted by: Mazzi455 | December 15, 2010 12:29 PM | Report abuse

What is never explained, perhaps cause it is assumed to be simple, but I don't understand is this:

Is the estate tax described above applied in addition to the tax on the income of the heirs to the estate.

If I win the lottery, I pay tax on that income. If I inherit the same amount of money, I still pay income tax on that money don't I? (assuming no special tax loopholes and joint custody of assets etc.)

So it *seems* like the estate tax is actually a double tax. Perhaps that is the intent, but that I think is why so many people who, while unaffected by this tax, object to it.

That much explanation is something I never hear; perhaps because it is too simple, or perhaps because it would really drive the estate tax into the ground. Double taxation is something nobody likes regardless of the circumstances.

Posted by: rpixley220 | December 15, 2010 12:32 PM | Report abuse

The estate tax also makes up for the "stepped up basis" the tax code gives assets passed through inheritance. The easiest way to think of “basis” is as an investment’s purchase price. So if you buy a stock for a million dollars and sell it for two million, you are only taxed on the million that the stock went up from when you bought it.
But death gives you “stepped up basis.” So if Uncle Moneybags bought the stock for a million and it was worth two million when he died and left it to you, your basis is the amount it was worth when he died. So if later you sell it for three million, you only owe taxes on the million it grew while you owned it. So without an inheritance tax – the million gain from when Uncle bought it to when he died, is never taxed!
This also gives the lie to the “Death Tax” opponents claim that the inheritance tax is “double taxation” because it is taxing income that has already been taxed.

Posted by: xrastone | December 15, 2010 12:35 PM | Report abuse

I believe the arguments against the estate tax are:

(1) NOT MY FAMILY FARM!

(2) The ability to efficiently transfer one's wealth to one's progeny greatly encourages individuals to pursue economically useful activity.

(3) 'It's my stuff, I earned it and even paid taxes on it already in the process. The government doesn't have any right to any of it.'

(4) Stealing stuff from dead people is a sick thing to do.

There may be a "(5) Rich people being rich magically creates jobs" out there, there usually is, but I don't remember having seen it.

Posted by: eggnogfool | December 15, 2010 12:47 PM | Report abuse

"What is never explained, perhaps cause it is assumed to be simple, but I don't understand is this:

Is the estate tax described above applied in addition to the tax on the income of the heirs to the estate."

Inheritance is not subject to income tax - it's a gift and treated as such. The only time it would be subject to income tax is if you inherited a tax-exempt investment vehicle - for example, a 401k - then took money out of it after you inherited it. That's because the money that went into it was never taxed as income. The same would be true if the original owner took the money.

So, no, inheritance is not subject to income tax. As a result, for example, if somebody inherited a $5M estate in 2010, that money would be completely tax free - no income tax, no estate tax, nothing. If the deal that's been proposed goes through that $5M would still be completely tax free. If the Dems get what they would like (doubtful) then the first $3.5M would be completely tax free and the next $1.5M would be taxed at 45%. Under the proposed deal, you'd get $5M. Under what the Dems want you'd get a bit over $4.3M. Either way, a pretty good deal for a chunk of change you didn't have to work for.

Posted by: shamey73 | December 15, 2010 12:50 PM | Report abuse

Appreciate all the explanations. The crux being that an inheritance is a 'gift' and 'gifts' are not taxed.
.
Helps make the argument that we do indeed need an estate tax :) If only the elected Dems could actually articulate that cogently...sigh

Posted by: rpixley220 | December 15, 2010 1:01 PM | Report abuse

"The basic insight behind the estate tax is that wealth concentration is a problem. That was true in 1916, when the tax was enacted, and it's true today, when it's being neutered." - - Therefore, we can conclude that, in the intervening 90+ years, having an estate tax in this country has not been successful in eradicating wealth concentration. Then why should it be extended if it has failed to achieve your rationale for the tax?

Posted by: cdosquared5 | December 15, 2010 1:07 PM | Report abuse

Someone teaching your kids or protecting your streets should pay taxes. But Leona Helmsey's cat shouldn't!

Only little people should contribute to our government!

Posted by: AZProgressive | December 15, 2010 1:08 PM | Report abuse

And the responses (I know these aren't your arguments) would be:

(1) NOT MY FAMILY FARM!

Myth: "The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004." (http://www.factcheck.org/article328.html)

(2) The ability to efficiently transfer one's wealth to one's progeny greatly encourages individuals to pursue economically useful activity.

So people will stop trying to get rich if some of the money they plan on leaving to their heirs might get taxed? That's as silly as the argument that people will try all they can to earn just under $250K if the income tax rates are allowed to return to Clinton-era level. "Hey, Sam, you did a great job this year...here's a $75K bonus.....No, no, Mr. Boss, if you give me that then my total income will be well over $250K and I'll have to pay those higher tax rates on the $75K. You keep it."

(3) 'It's my stuff, I earned it and even paid taxes on it already in the process. The government doesn't have any right to any of it.'

And your inheritors earned this money and paid taxes on it already how? Heck, I'm sure the dollar in my pocket right now that came out of my paycheck once belonged to somebody else and they probably paid taxes on it - why did I have to pay taxes on it as well.

(4) Stealing stuff from dead people is a sick thing to do.

It is impossible to steal from dead people because, well, they are dead. Nobody is taxing the dead person - the people who got the money for nothing are being taxed.

Posted by: shamey73 | December 15, 2010 1:11 PM | Report abuse

No primer is complete without COMPREHENSIVE hard core data. For example, where are the numbers telling us how many farms and businesses and homes get sold each year due to inability to pay estate taxes?

Let's examine some of Ezra's comments from above:

"With a $1 million exemption and a 55 percent rate -- in other words, what will happen if we do nothing -- the estate tax would raise about $700 billion over the next 10 years...If the tax goes back to its scheduled levels, it'll tax 2 percent of estates..."

So based on those comments, the estate tax, if left unchanged, will reap $700 BILLION from only 2% of estates.

Seems to me that's a big reason lots of those estates are going to be sold to even wealthier people (probably Saudi Arabian investors) or transnational corporations.

Now I know there are lots of fat cats in that 2% I'm not too much worried about. But in many locations today fairly normal HOUSES can cost over one million dollars. Lot's of middle-class Americans are going to be hit by that tax and will have to sell their family run businesses, farms, or homes.

All I'm saying is we need to be careful when setting the estate tax, and to me, one million is too low a threshold because it's gonna eat up a lot of middle-class folks.

Posted by: lauren2010 | December 15, 2010 1:14 PM | Report abuse

Hmmm. $70B divided by $400M = 175. A 175-bagger! That turns $10,000 into $1.75M. This lobbying business kinda makes convention investment look dumb. I wonder how long before someone finds a way to securitize it? I agree with Mr. eggnog above. Got to find an interest to pit against it. Mortgage interest deduction anyone?

The disheartening thing is that should really be argued as an ethical issue. Get Gates and Buffet up to testify on it. And another thing, why not describe the plans as follows:
- A $3.5M exemption with 45% rate is a 5.6% tax on the first $4M and a 29% tax on the first $10M
- A $3.5M exemption with a 55% rate is a 6.9% tax on the first $4M and a 36% tax on the first $10M

Fiscal hawks should announce a dramatic new strategy that REDUCES the tax down to 7% on the first $4M, down to 30% on the first $10M and then escalates up toward the old rates but never exceeding 50% of the estate (it would still be below 40% on estates <$15M). Then dare people to vote against it.

Posted by: BHeffernan1 | December 15, 2010 1:17 PM | Report abuse

One more response to this one:

"(2)The ability to efficiently transfer one's wealth to one's progeny greatly encourages individuals to pursue economically useful activity."

Even if that's the case, couldn't you also be discouraging the presumptive heirs to the estate to not participate in any economically useful activity because they just have to wait until the person dies, at which point they'll get a bunch of 100% tax free money? For every productive 1 rich guy or woman you could have 3 completely unproductive kids waiting to be rich. Heck, Paris Hilton's grandfather pledged most of the family fortune to charity and she still isn't doing anything economically useful.

Posted by: shamey73 | December 15, 2010 1:21 PM | Report abuse

Also (shamey correct me if I'm wrong) it's important to remember that each person gets a death tax credit (be it 1, 3.5, 5 million dollars) which transfers from one spouse to another at death. So we're really talking about $7 or $10 million exemptions in a lot of cases with these proposals.

Posted by: dollarwatcher | December 15, 2010 1:29 PM | Report abuse

Compare the scale of the loud outraged screaming with the scale of the actual taxing:

House Dems want to raise $40 billion per year. Plan as proposed would raise $30 billion per year.

Neither plan comes close to the level of taxing which operated under Clinton.

Translation: Whatever one thinks the estate tax should be, gullible liberals are being conned by loud, disingenuous Dems.

Posted by: bobsomerby | December 15, 2010 1:46 PM | Report abuse

"Also (shamey correct me if I'm wrong) it's important to remember that each person gets a death tax credit (be it 1, 3.5, 5 million dollars) which transfers from one spouse to another at death."

Correct - Estates can pass to a surviving spouse completely tax free.

Also, remember, the total tax paid on the estate received isn't going to be, under the proposed deal, 35%. Consider the case of a $7M estate under the proposed deal passed on to a single, non-spousal heir. $5M is tax free, $2M is taxed at 35%. So the total tax paid on the $7M is about 10% ($700K). Again, pretty good deal.

Posted by: shamey73 | December 15, 2010 1:48 PM | Report abuse

if concentration of wealth is such a problem, why wait until a rich person's death to rectify the problem? Annually tax each individual's net wealth above say $5m, at a rate of 45%. - - Ezra's sophomoric liberal logic

Posted by: cdosquared5 | December 15, 2010 1:58 PM | Report abuse

rpixley220, NO. That is not true at all. An inheritance is NOT taxable income to the person inheriting it. Estates are taxable only over the exemption amount, be it 3.5 million or 1 million. Nobody who dies with less than that amount pays a cent in death tax. In addition, the assets are revalued to the value at the date of death, so if someone dies with appreciated assets under the limit, a house that they bought years ago, or stock that has increased in value, not only have they NOT paid any tax on the money they made while they were alive, but they also pay no tax at death, and the beneficiary also does not pay any tax on that prior appreciation.

Posted by: scottilla | December 15, 2010 2:00 PM | Report abuse

It's about class mobility. If kids of rich people get to keep all the wealth passed down by their parents, we get a permanent aristocracy. With the estate tax, we get money for public schools and public infrastructure, to give people who work hard, have talents, and take risks the ability to move into a higher class.

Posted by: LoriWisconsin | December 15, 2010 2:06 PM | Report abuse

I will add that I feel exemption could be made on a per- ~equal share inheritor basis; if your argument is based on fighting 'wealth concentration', then there is a significant difference between giving your $10M estate to your only child and splitting up your $10M estate evenly between 26 grandkids. I'd be pretty happy with a $1M per inheritance share exemption, with something in the neighborhood of 45% past that.

A system where one inheritor can get 100% of his $3.5M inheritance tax free, where someone else sees almost half his $1M inheritance get gobbled by the IRS (because he is splitting with a number of others) doesn't make sense from the perspective of those still living.

Posted by: eggnogfool | December 15, 2010 2:07 PM | Report abuse

As one of the few conservatives that frequents the board, you may be surprised by my take on the estate tax. What Ezra made a small attempt to do above was what liberals have been lacking...explaining the historical reasoning.

The estate tax was intended for the express purpose of prohibiting a new 'royalty' from forming among wealthy Americans who might concentrate vast wealth into the hands of a few. The estate tax was never meant to be just another vehicle to fund new progressive/liberal social programs. The GOP has been successful in exposing the fact that most liberals simply want the estate tax reinstated so they can resume growing government bigger, so most Americans oppose the estate tax...because most Americans believe government is plenty big enough.

But here's the problem, as usual, with the way progressives like Ezra think and talk about the estate tax:
1) "repeal will cost..." whenever a progressive leads with the statement of what a tax break will 'cost', they reveal their view that they believe all wealth ultimately belongs to the collective, and whatever amount they let us keep is a 'cost'. Most Americans recoil against the progressive ideal that somehow progressives have a right to take the money I have earned so THEY can spend it however they see fit.

2) Applying fixed dollar amounts - be it $5M, $3.5M, $10M - is foolish economic policy when trying to apply it to a national tax base. Since all assets are considered in the valuation of an estate, how can you rightly determine that a fixed dollar amount like $3.5M is fair when a primary residence on Long Island is vastly different in value than a primary residence in Boise? Is it fair to include the 100 year old 1,000 acre farm of a 3rd 5th generation farmer in Fargo, when the 2,000 sq ft penthouse apartment on the Upper West Side of Manhattan is excluded from a millionaires 'estate'?

The problem most have had with the estate tax is that, by including land and primary residences and business ownership stakes in the value of the taxed 'estate', everyone knows a story of a family that was forced to sell family farms or small businesses just to pay the federal estate tax.

When the estate tax was introduced, the intent was merely to prevent the Rockefellers and Fords from becoming a new royalty-ruling class. What it was not intended to do was to bankrupt farms and small businesses.

Posted by: dbw1 | December 15, 2010 2:19 PM | Report abuse

Lots of miscellaneous comments:

The estate tax isn't so much about breaking up concentrations of wealth as it is in impeding the formation of **dynastic** wealth. Clannishness (as we've seen in a couple of wars just recently) is not conducive to high-functioning societies.

The statement, "...roughly 440 taxable estates were primarily made up of farm and business assets in 2004" is very surprising. (I checked the table from the TPC, and the definition of "primarily" is ">50%", which is a perfectly reasonable definition.) Why is this number so low? Are proprietors selling businesses to their children at token prices before they die? I thought there was stuff in the capital gains tax code that prevented that from happening. Anybody know what the estate planning trick that's being used is? Clearly, more than 440 successful business owners are dying per year.

Re. houses in some areas being >$1M: If you have a residuary trust, you can gift up to $1M to the residuary trust, to the benefit of your spouse or children. The net result of this is that only trivial estate planning is necessary to ensure that a house is exempt from estate taxes.

The biggest problem with large estate taxes (and, for that matter, **all** taxation schemes that become annoyingly progressive) is that large estates have always had large amounts of tax planning, just as people with large incomes typically have a variety of ways of sheltering that income. It's simply a fact of life that rich people have a number in mind on what they feel is a fair percentage to pay in taxes, and they simply won't pay more than that number.

How do they accomplish this? Through a variety of mechanisms:

1) They can afford the tax planning resources that allow them to avoid paying more than they want to.

2) They have lobbying resources that affect government policy, and they have the ability to assist people sympathetic to their cause in getting elected.

3) If the above strategies don't work, they can always take their assets to someplace where their tax burden is reduced to the proper level.

4) And if that doesn't work, they can simply stop generating income.

You can have an argument about whether this is fair or not. I'm sympathetic to that argument the same way I'm sympathetic to the argument that math and physics would be a lot simpler if pi were equal to 3.0 instead of that nasty irrational number. In neither case will my sympathies change reality. Ultimately, "the consent of the governed" applies to rich people, too, and Maggie Thatcher's quip that "eventually you run out of other people's money" is going to be correct for the foreseeable future.

Posted by: theradicalmoderate | December 15, 2010 2:23 PM | Report abuse

Good explanation.

I'm hoping that people read it, and get that this tax affects only the wealthiest people in the country.

Posted by: Benson | December 15, 2010 2:24 PM | Report abuse

I am not a wealthy person by any means, nor do I stand to inherit millions. HOWEVER, I really dont understand the lynch the wealthy for being wealthy way of thinking. The government needs more money, so take it from those who have been the most successful because they have it. I feel like we should all be treated equally. Wealthy should not be penalized for their success. And anyway - the $1M exemption of earlier years seems way out of line. $1M these days does not go far.

Posted by: dcchica1 | December 15, 2010 3:14 PM | Report abuse

We could ask the poor for money, but, ya know, they're poor. They don't have it....

Posted by: JkR- | December 15, 2010 3:26 PM | Report abuse

@xrastone "The estate tax also makes up for the "stepped up basis" the tax code gives assets passed through inheritance. The easiest way to think of “basis” is as an investment’s purchase price. So if you buy a stock for a million dollars and sell it for two million, you are only taxed on the million that the stock went up from when you bought it.
But death gives you “stepped up basis.” So if Uncle Moneybags bought the stock for a million and it was worth two million when he died and left it to you, your basis is the amount it was worth when he died. So if later you sell it for three million, you only owe taxes on the million it grew while you owned it. So without an inheritance tax – the million gain from when Uncle bought it to when he died, is never taxed!
This also gives the lie to the “Death Tax” opponents claim that the inheritance tax is “double taxation” because it is taxing income that has already been taxed."

The logical thing to do is to repeal the estate tax and the stepped up basis at the same time, which I believe Steve Pearlstein has argued for in the past.


"Ashland, Mo.: Allegedly part of the stimulus package will be to freeze the estate tax provisions at this year's level. My perhaps faulty memory is that the full repeal was to be paid for by eliminating the stepped up basis for assets that were inherited. If that is correct, would more taxpayers benefit from the stepped up basis rather than elimination of the estate tax? How does one determine whether this is an overall tax cut or increase?

Steven Pearlstein: This is a good, if somewhat technical question. I don't believe the Bushiest wanted to "pay" for inheritance tax repeal by eliminating the stepped up basis -- that is, by requiring those who inherit stocks and bonds to pay the capital gains tax based on the original price of those assets, not on the basis of what they were worth at the time of inheritance. But that is certainly one alternative to the inheritance or estate tax, since it would raise roughly as much money. Obviously the timing would be different, and without the $5 million exemption, it would hit harder at genuinely small business owners who would otherwise be exempt. But many tax reformers prefer that route because it is fairer and more neutral. I'm actually one of those people, although I think the capital gains tax should be paid upon inheritance by the beneficiaries of the estate, in lieu of an inheritance tax, with extended periods allowed to pay those taxes in the case of inheritance of operating businesses or farms."

http://www.washingtonpost.com/wp-dyn/content/discussion/2009/01/13/DI2009011301587.html

Posted by: jnc4p | December 15, 2010 3:30 PM | Report abuse

I actually considered adding a post saying
(6) "Why do liberals always begrudge the rich their hard-earned rewards?"

Anyway, their are millions of children in this country with no health insurance, many homeless, many without access to decent schools etc. And there's a reason Willie Sutton robbed banks (it's not because he hated bankers).

Posted by: eggnogfool | December 15, 2010 3:32 PM | Report abuse

@rpixley220 "Appreciate all the explanations. The crux being that an inheritance is a 'gift' and 'gifts' are not taxed.
.
Helps make the argument that we do indeed need an estate tax :) If only the elected Dems could actually articulate that cogently...sigh"

There is a gift tax.

http://www.irs.gov/businesses/small/article/0,,id=108139,00.html

Annual exclusion amount is $13,000 on or after January 1, 2009.

This is completely separate from the estate tax that is being discussed here.

http://www.irs.gov/businesses/small/article/0,,id=108143,00.html

Note that one of the quirks about the gift tax is that there is no stepped up basis as there is with the estate tax. I.e. there are different rules for if grandpa gives you a bunch of stock while he is alive versus after he dies.

Posted by: jnc4p | December 15, 2010 3:44 PM | Report abuse

I'm ok with saving all the family owned farms and businesses as long as we pass another law that says the children HAVE to stay on the farm on run the business and are not allowed to sell or leave. After all, if we're crying all those crocodile tears for these people, they shouldn't be allowed to laugh at how stupid we were and sell the business next year!

Posted by: 54465446 | December 15, 2010 3:44 PM | Report abuse

@54465446 "I'm ok with saving all the family owned farms and businesses as long as we pass another law that says the children HAVE to stay on the farm on run the business and are not allowed to sell or leave. After all, if we're crying all those crocodile tears for these people, they shouldn't be allowed to laugh at how stupid we were and sell the business next year!"

Repealing the estate tax and the stepped up basis together solves this problem nicely. Whenever they sell the farm or the business, they will have to pay taxes on the gains.

Posted by: jnc4p | December 15, 2010 3:53 PM | Report abuse

How does stepped up gains handle inflation? Is it inflation blind, and therefore very inflation sensitive or is there an adjustment?

If it's blind, I 100% approve of 0 estate tax + stepped up gains, so long as the fed keeps inflation above 2%.

Posted by: eggnogfool | December 15, 2010 4:11 PM | Report abuse

jncp:

You are correct, but no one is proposing ending the stepped up basis, except on this board. (my post was of course tongue in cheek)

I can just imagine the great wailing and gnashing of teeth that would come from that attempt.

Posted by: 54465446 | December 15, 2010 4:12 PM | Report abuse

All heirs pay is tax on the gains earned after they inherit the property. Normally the gain is measured from date of death and the heir pays tax on gain if any. With no tax this year, people have to find the decedent's basis and pay the tax on the FULL gain. If there are insufficient records, then the tax is owing on the whole proceeds.

Posted by: Mimikatz | December 15, 2010 5:00 PM | Report abuse

Ezra ... I want to clarify your thoughts on this as well as the consequences.

Suppose Bill Gates and his wife pass away together with the estate tax in effect.
I choose Gates because he is not a direct example having promised to give most of his money away to charity.

But say he didn't.
Now before his son inherited the estate of $60B ... the government would need to get it's share ... something in the range of $33B.

But of course Gates doesn't REALLY have $60B.
What is has is a bunch of papers called stock which others would pay $60B for.

So they have to actually sell those papers to raise the $33B.

Flooding the market with that much Microsoft stock will plunge the value. Probably to 25% of the current value.

So the would end up selling ALL the stock, the kid would get nothing, as the estate would only have $15B but still owe almost $18B.

Ah well the kid didn't deserve anything anyways.

And the OTHER 50 million shareholders whose stock is now nearly worthless. Probably do not matter.
As well as stock holders of companies allied to MS.

Total loss in that case would probably be about 1-3 trillion dollars of total wealth. Only $45B of it being Gates.

In your 55% estate tax world. All someone would have to do to make every country in the world collapse is ...
Assassinate Gates, Larry Ellison and their wpouses kicking in the largest dump of stock ever.

Crash boom out goes the lights.

BUT ... it is UNFAIR that Gates and Ellison's kids get that money!!! UNFAIR I tell you!!!
So what if it crashes the entire world market.
Fairness and principle before competence!

Posted by: chromenhawk | December 15, 2010 5:05 PM | Report abuse

@Mimikatz "All heirs pay is tax on the gains earned after they inherit the property. Normally the gain is measured from date of death and the heir pays tax on gain if any. With no tax this year, people have to find the decedent's basis and pay the tax on the FULL gain. If there are insufficient records, then the tax is owing on the whole proceeds. "

I believe you are mistaken on this. I believe the stepped up basis was left intact, but the estate tax rate is 0%. The heirs will pay tax on gains from the date of death, but no initial inheritance tax.

Posted by: jnc4p | December 15, 2010 5:19 PM | Report abuse

@Mimikatz:

Really? Of course, cap gains rate is negligible right now too.

This being true, its more important to maintain a decent gap gains rate; 30% of everything is probably more than 35% of everything over 5 (10?) million, in aggregate.

Posted by: eggnogfool | December 15, 2010 5:20 PM | Report abuse

http://www.jensenestatelaw.com/colleagues/newsletters/205-the-2010-basis-qstep-upq-rules-wealth-counselor-volume-5-issue-2

wow what a mess

Posted by: eggnogfool | December 15, 2010 5:25 PM | Report abuse

(1) NOT MY FAMILY FARM!

Myth: "The Tax Policy Center projects that roughly 440 taxable estates were primarily made up of farm and business assets in 2004." (http://www.factcheck.org/article328.html)

Posted by: shamey73 | December 15, 2010 1:11 PM

OK, I never post on boards because they become ridiculous shouting matches, but this one seems relatively civil. That said, as an heir to a family farm:

Not myth. At least as provided by the USDA:

http://www.ers.usda.gov/publications/eib54/eib54.pdf
http://www.ers.usda.gov/AmberWaves/June09/Features/FederalEstateTax.htm
http://www.ers.usda.gov/Briefing/WellBeing/federaltaxes.htm#estate

The last ten years have been good for farm estates, yes. The problem is that people keep throwing out 2009 numbers. But unless the tax bill passes, the resurrection of the estate tax occurs at 2000 numbers, with an inflation adjusted bottom line of $1M. Because of the massive increase in land valuations over the past 10 years -- an average of 50% -- an estimated 1 in 10 farm estates will owe taxes in 2011, while the estate tax is meant to cover between 2% and 2.5% of the general population. This means a 300% increase of tax liability for farm estates.

Also problematic is that the step-up in basis was replaced, to the best of my understanding, in 2010 with a carryover basis. I'd be interested to know if the step-up returns with the tax bill or not. If it doesn't, and you've forced farm heirs to sell non-liquid assests to cover tax liability, they are then charged with a capital gains tax as well? Isn't this exactly the kind of double taxation against which conservatives argue?

Incidentally, the USDA estimated of 38,234 farm estates in 2009, 2.9% were required to file and 1.6% were required to pay some form of estate tax. That works out to 1109 and 612. Since the tax cap has gotten progressively higher, I'm going to question those 2004 TPC figures.

Posted by: oxstu1 | December 15, 2010 5:29 PM | Report abuse

dbw1: "Since all assets are considered in the valuation of an estate, how can you rightly determine that a fixed dollar amount like $3.5M is fair when a primary residence on Long Island is vastly different in value than a primary residence in Boise?"

You can rightly determine it because, well, that's what people are willing to pay for it. Yes, you get less square footage in suburban Long Island than what you'd get in Boise. That's because the Long Island location is for more people more desirable. A 2BR unit is less expensive in Boise than a 2BR unit on the Upper West Side of Manhattan because the latter is...on the Upper West Side of Manhattan. If you can afford the latter, you must be doing pretty well. So I don't see the unfairness in the valuation.

Posted by: dasimon | December 16, 2010 12:29 AM | Report abuse

As usual, Klein starts out with a faulty premise:

"The basic insight behind the estate tax is that wealth concentration is a problem."

It's only a problem for collectivists who want that wealth to spend on their inane, incompetent schemes, otherwise it's another made up fear that propagandists are fond of amplifying as part of their class warfare schtick.

The idea of static pools of wealth accumulating in a few bank accounts is nonsense (and even if it weren't, the money doesn't belong to the collective, and the collective has no right to it):

http://www.ncpa.org/pub/st289?pg=5

http://blog.mises.org/15005/food-for-thought-the-state-versus-the-market/

Posted by: msoja | December 16, 2010 10:21 AM | Report abuse

Also, the Brandeis quote is baseless opinion, and not established fact.

Something more apt might be: "The greatest dangers to liberty lurk in the insidious encroachment by men of zeal, well meaning but without understanding." That fits Klein to a "T".

Posted by: msoja | December 16, 2010 10:31 AM | Report abuse

This is a little old, but you can see many countries have no estate tax:

http://www.cato.org/pubs/tbb/tbb-0606-36.pdf

Canada is one of them. Our 35% rate will still be one of the highest in the world. Shouldn't we be trying to attract rich people instead of chasing them away?

Sorry about the formatting, but here are the data:

Japan 70% Argentina 0%
South Korea 50 Australia 0
United States 46 Canada 0
France 40 China 0
United Kingdom 40 Colombia 0
Spain 34 Cyprus 0
Germany 30 Czech Rep. 0
Belgium 30 Estonia 0
Netherlands 27 India 0
Venezula 25 Indonesia 0
Chile 25 Israel 0
Hungary 21 Latvia 0
Philippines 20 Lithuania 0
Norway 20 Malaysia 0
Ireland 20 Malta 0
Greece 20 Mexico 0
Luxembourg 16 New Zealand 0
Finland 16 Portugal 0
Hong Kong 15 Russia 0
Denmark 15 Slovak Rep. 0
Austria 15 Slovenia 0
Turkey 10 Sweden 0
Singapore 10 Switzerland 0
Poland 7 Thailand 0
Brazil 4
Italy 3

Average 13

Posted by: sorry_no_email | December 17, 2010 4:14 PM | Report abuse

The article is in assisting estate planners and those seekingt their services. For small business owners I would suggest using www.ibankr.com. It has a business value calculator and step-by-step instructions on how to sell a small business, if you're interested.

Posted by: SmallBusiness1 | December 21, 2010 3:23 PM | Report abuse

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