Estate taxes in the future?

If you are totally confused, you understand the situation perfectly.

There are many people in and out of politics that want as much of your money as possible, as they feel they can serve mankind with it better than you can, or better than they can with their own money. And/or they just can't stand it!

Watch for arguments for:

1. estate tax rates to go up
2. estate tax exclusion to go down
3. step up in basis to disappear
4. certain elements useful in estate planning (or favorable in computing estate taxes) to disappear, such as discounts from appraised values of underlying assets for partnership interests.

I am not saying any of these things will occur, but those takers will try to make them happen.

I have yet to figure out how to plan given the above.

President Obama recently proposed taxing inherited capital gains over $200,000 (to use your terminology). That proposal got shot down pretty quickly. In the current political climate it's not going to happen. But 10 or 20 years from now, who knows? Your guess actually is as good as anyone else's. Of course, there will be lots of influential people, many of them with much more money than you have, lobbying against any change.

If the rules do change, though, millions of people will be affected. You won't be the only one. There'll be plenty of press about what, if anything, you can do about it. In any case, there's nothing you can do about it right now.

Bob Sandler

Considering the influence of the people that this will affect the most, I think there's a good chance that if there's a radical change in the future there will be a grandfather clause (appropriately named, since the people it benefits will mostly be elderly). So if you're still young when it happens, you'll likely have time to plan.

Have we ever seen any such grandfather clauses for all the various changes in the estate tax in the past? I don't recall a single one.

First of all, in the nearly 40 years I've been watching (and it may be a lot longer, but I'm just not going to take the time to check) any changes to the estate tax have been in increase the exemption and lower the tax (except for the time they brought it back after eliminiating it completely).

So if the estate tax goes in any direction, my guess is that it is more likely to be in a way that is more favorable to the taxpayer than otherwise.

Second, when the generation skipping transfer tax came into being, there was a provision that allowed an exemption for trusts drafted within a specific time period. At the time it was informally called the Gallo exemption, because it was thought to have been inserted as a favor to the Gallo wine family.

: Have we ever seen any such grandfather clauses for all the various changes : in the estate tax in the past? I don't recall a single one.

Back in the 70's when ending stepped up basis was first proposed, it allowed that chang(never actually enacted) to start as of the date of instituting the law, so any gains form purchase to that date would still be considered part of the basis withonly the gains fomr the effective date to be considered whenever the stock was sold. this stepped up basis would have affected, thot the person whose estate it ws during hir lifetime, but would have affected those who inherited the stock, house, or whatever that had had gains fomr the date of the law. I would call thins a kind of semi-grandfathering as it would not have required maintatining the basis from the time of purchase, but from a a January 1 197?. All kinds of tables were published innewspapers for stock bases on that January 1. For tangible objects or real estate gettign that basis correct was more difficult.

In 2010 the year the estate tax ws supposed to end and all bases were to be stepped up , it was scary for my family as mu husband lasft considerably less than the amount previously allowed for no estate tax adn we would have had to pay stepped up basis on all his holding and the real estate, leavign us much worse off than having an estte tax only for estates about a certain level as it is now. Fortunately, they changed the law in the middle of the year giving one a choice of paying an estate tax for estates above $5,000,000 and stepped up basis for all or paying no estate tax even on billions but with stepped up basis for all, eventhose with esttes less than $5,000,000. IIRC George Steinbrenner, the owner of the NY Yankees died that year and his familiy had the choice.

Wendy Baker

Yeah. One of the biggest complaints about the estate tax is that it hasn't been indexed to inflation. So the percentage of taxpayers who fall into the range that it affects has steadily increased, so it now affects many middle-class families, not just the "rich".

My, it's been a while since I've seen so many falsehoods in one paragraph (most likely due to their frequent repetition in some parts of the media.)

The estate tax is indeed inflation indexed. The individual exemption was $5.25 million for 2013 and is now $5.43 million. Since most rich people are married and a couple can share the exemption, that means that estates under $10,860,000 pay no estate tax at all. Zero. Zilch. The rate starts at 7.7% on the next $5m per individual ($10m per couple), so you'd need impressively incompetent estate planning for that to destroy your assets.

Maybe things are different in other parts of the country, but around here, people with $10 million estates are not "middle class."

This web page has some other useful info, such as addressing the myth that the estate tax forces people to sell small businesses (it doesn't) or to break up family farms (nobody's ever been able to provide an actual case):

I'm not an estate tax expert, but we certainly saw a grandfather clause for mortgage interest deductions (pre-May 1987), and for rentals converted to personal residences (pre 2009), so it's not like the concept is that rare or unlikely.

The tax itself isn't indexed for inflation. But the lifetime exclusion is.

Well, sort of. If someone dies and the spouse remarries, the surviving spouse will only get to use the married couple portable exclusion once. So it is possible that one may go to waste, unless proper planning procedures are used.

I have no idea where you get that. Under the code, the rate of tax is 40% on estates over $1 million. Estates over $5 million are certainly more than $1 million.

Sorry, that was an effective rate on the whole estate. You're right, once you're above the exclusion amount, the rate quickly ramps up to

R's, John

It DOES force people to sell small businesses, or take on a lot of debt to maintain ownership.

I find a lot of bad conclusions in that article. The biggest one of all is that if few people pay the tax, it is somehow "fair".

On occasion. Generally it is thought that the people who may be required to sell sell or property to pay the estate tax will be left with enough money that they can afford to do that.

But are you entitled to a lot just because your parent accumulated a lot?

The government must be funded somehow. Most people think it's fair that those with more have the ability to pay more, and so they should.

How would you allocate the obligation to fund the government?

Really? Do you have citations?

I would think that if I had a family owned business worth over $10M, I would pay someone to do estate planning and probably buy some insurance to pay the tax. If this is a tax on people too dim to realize that they're not immortal, my sympathy is limited.

So, what's so bad about that? Successful businesses borrow money all the time. Just like other retirement investments, the ability to defer income during one's lifespan is not meant to automatically extend to the heirs in perpetuity.

Yup, things change when a business owner dies. Note that if the business was truly "family owned", then there would not be much of an estate issue since the family owners would still be alive.

So, they have to buy expensive insurance rather than investing in their business? And depending on the specific situation, pay gift taxes to fund the insurance? This death tax is a total distortion of reality at all levels.

Perhaps you have not been involved much in family businesses. The old world has not left us, and many such small businesses pay the second and third generation less than they might get elsewhere, to keep building the business for their eventual inheritance. So, the next generation already has contributed to the business, although they don't have title. And don't tell me they should just pay the second generation more, blah, blah, blah. That is not how many such businesses and families operate and I don't like tax policy further eroding the family unit.

The biggest problem with the estate tax is that it is another "one size fits all" government policy, and people look at Warren Buffet and Bill Gates to think about how out estate tax should be. They are a rather special case, and nothing done to the estate tax, other than not allowing charitable deductions prior to figuring the tax, will effect them whatsoever. Not so with more run of the mill people subject to the estate tax.

One of the reasons for gift and estate taxes is that this country, as opposed to some others, doesn't want dynasties, people with no ambition, no motivation, who contribute nothing to society or to themselves, and live off the labor of some dead relative.

As John said, if someone is in a situation where he can accumulate $10 million over his lifetime, there are ways he can minimize the effect of estate tax on his heirs. If he doesn't do that, perhaps he figured that his heirs should work a for what they have, like he did.

If the second and third generations invest in a business by working there for less, that is their choice. And the choice of their parents. It is, after all, an investment in the future.

But the parents also have ways to transfer ownership to the children over the years, and reduce estate taxes that way. If they don't, it may well be on purpose, fuguring the younger generations should not receive everything they want, tax free, merely by viture of entitlement.

Again, that is the choice of the business owner.

It costs the business owner next to nothing to slowly transfer ownership to his heirs over the year. If he does not do that, that's his choice.

True family businesses have provisions in the tax code to pay estate taxes over time at low interest rates. But someone has to pay taxes to fund the government. Where would you prefer that money comes from?