Estate taxes

[rurallib]

I just received this email from the Iowa Policy project concerning estate taxes. I thought many of you would find it very interesting.
Iowa Policy Project is a think tank type operation that analyzes fiscal policies:
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FOR IMMEDIATE RELEASE: Thursday, Dec. 3, 2009
Also available at our Iowa Policy Points blog <http://tinyurl.com/yevwvlw>

Beyond estate-tax scare tactics

Statement by IPP Research Director Peter Fisher about the estate-tax debate in Washington.

"It is time to get past the scare tactics that have now become common any time Congress discusses the federal estate tax.

The multimillionaires and billionaires who walk among us have already been well cared-for, thank you, by many politicians who want to pretend they’re looking out for the dead.

The estate tax has steadily declined since 2001, with the top rate falling from 55 percent to 45 percent now, and exemptions rising from $1.3 million per couple in 2001 to $7 million this year. That means $7 million is tax-free. Not surpringly, only two-tenths of 1 percent of all estates are required to pay any federal tax at all on an inheritance.

This is not good enough for some, who push for repeal or so-called “compromises” that are tantamount to repeal. Meanwhile, our federal deficits are mounting and creating debt that will fall to the children of middle-income America, if not the grandchildren of dead billionaires.

As stated this week by Chuck Marr, federal tax policy director for the nonpartisan Center on Budget and Policy Priorities:

In the aftermath of Hurricane Katrina in 2005, Iowa Senator Charles Grassley stated that “it’s a little unseemly to be talking about doing away with or enhancing the estate tax at a time when people are suffering.” What the senator said remains true today: given the current economic crisis and the human anguish it has caused, it would be more than “a little unseemly” to shrink what remains of the estate tax.


The Institute on Taxation and Economic Policy has produced a good factual summary of how the estate tax affects people in every state. Here are some of the key numbers for Iowa:

IOWA
Number of Estates Owing Tax: 2006 — 237; 2007 — 158; 2008 — 225
Percentage of Estates Owing Tax: 2006 — 0.9 Percent; 2007 — 0.6 Percent; 2008 — 0.8 Percent


Those estates that do pay tax represent windfalls to beneficiaries of vast fortunes, the contents of which in large measure were never taxed before.

Is it a greater priority to absolve those beneficiaries of the need to contribute to public services — and make everyone else in the United States borrow billions more from overseas to pay for it — or to establish reasonable rules once and for all to assure the very wealthiest in the nation pay taxes?

Do we pass on millions tax-free to the heirs of American aristocracy, or do we pass on billions or trillions of debt to America’s teen-agers?

How can these be difficult questions?"

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Peter Fisher is research director of the Iowa Policy Project, a nonpartisan public policy research and analysis organization based in Iowa City. IPP reports are on the web at www.iowapolicyproject.org. IPP is part of the Iowa Fiscal Partnership, where sound analysis on tax policy is found at www.iowafiscal.org

[vadawg]

1. personally ive got no problem with people inheriting money or property

not sure what the tax rate should be on it but is should not be prohibitive or used to discourage the passing of businesses, properrty or other wealth to ones kids...

[WCGreen]

4. They don't pay tax on the gain.

From what I understand, there is what is called a bumped up basis.

It works like this. Say you own a farm that you purchased for $ 150k. The farm has appreciated in value to $350k. If you sold that farm to a developer, you would have to pay a capital gains tax on $ 200k, the difference between what you paid, the basis, and what you took in when you sold the farm.

Now if you died and you widow sold the farm, same scenario, she would owe no tax since the basis of the farm is value at what it was worth on the day you died...

Now death should not be the determining factor in how an asset is priced or taxed.

[vadawg]

6. As i said i dont know the percentages but if i as a parent want to leave my kids set up for life

i dont think that is a bad thing, trust funds, college trusts and retirement investments, property etc etc etc are all good things to pass on to your kids.. I dont mind there being some taxes but i dont like the idea of prohibitive taxes or what some people advocate, downright confiscation...

[WCGreen]

27. They should be taxed on the gain when the assets are sold...

[DuckBurp]

30. In reality, it's more complicated than that.

But, let's forget the exemption and marital deduction for your example. And disregard its agricultural use which normally gives it favorable tax treatment. The value of the property determines its taxability for estate tax purposes, without regard for its basis.

[TicketyBoo]

38. But in this example,

I don't believe estate taxes were involved. WCGreen was talking about capital gains taxes on inherited property which is then sold. This is income tax, not inheritance tax.

If you didn't inherit a lot more than that hypothetical farm, you wouldn't owe any estate tax.

[DuckBurp]

43. Yes, that was confusing

I wasn't sure whether WCGreen was talking about capital gains/income tax or about estate tax.

[WCGreen]

53. I was just using an example so that people could understand it...

I know it's a lot more comlicated, I do taxes, not Estate Taxes, but I have been faced with dealing with the bumped up basis several times.

[TicketyBoo]

36. The way I understand it

that's only true if your wife's name was not on the deed of the farm along with yours.

If you were co-owners, she would still have the capital gains tax liability on the full gain.

If it were passed down to a child (or if the wife were not a co-owner), then the basis would be the value on the date of inheritance.

[WCGreen]

52. Only half tohe property....

[rurallib]

5. Estate taxes have really been misunderstood.

Imagine that. Our media has done a masterful job of twisting the arguments such that you almost feel sorry for the picked on Walton kids, not to mention the Mars kids.

This is something that I have had to wrestle with in my own mind. It is also something the founding fathers wrestled with a great deal. For one thing, they did not want to break free of an aristocracy based on birth only to set up an aristocracy based on wealth and perpetuated by inheritance.

First let me say that one of the major reasons for government is to set rules that make transactions between two entities workable. To keep the apparatus intact to keep the rules of transactions functional there needs to be financial support of that system. Inheritance is a financial transaction between two people.
Second, for the most part inheritance usually involves the receiver getting moneys not earned.
Third, often stock or other commercial paper is transferred. I believe by law now that there is no capital gains on the difference paid by the deceased and the current cost of such paper. Ergo, if I buy 100,000 shares at $10 and transfer via an estate to my son at $100 there is no capital gains. Therefore he has received a windfall with no tax.

I will admit that I am no lawyer nor financial guy. That is my understanding. But based on that my feeling is that there should be some tax at the transfer of property that helps maintain the underlying system that has allowed someone to amass a fortune.

[vadawg]

7. yup i understand what you are saying i just have no problem with you giving your kids an unearned

windfall, one of the reasons why people work their asses off is so their kids can have an easier and better life, its why parents struggle to put their kids through college, or move to a better school district, or why the parents invest in order to leave their kids something...

[rurallib]

9. Which is where the conflict comes in

do we want a aristocracy based on inheritance?

[vadawg]

10. depends on whether you believe that you should be able to build for your kids and grandkids

or whether you believe that no one should be able to get a headstart, but why then limit it to money, or property, what about other advantages that kids can get from their parents...

[Gormy Cuss]

46. Current and recent estate tax laws allows plenty of transfer tax-free.

It's also possible to transfer about $12,000 a year per child tax-free while you're living.
That's without getting into trusts and other methods of transferring assets.

Nothing in the tax code is preventing parents from giving their kids a financial headstart.

[Statistical]

50. Well the $12K does count again the estate tax.

[Gormy Cuss]

51. Really? I thought that only taxable gifts worked that way.

My understanding is that taxable gift amounts can be offset by the unifed credit, which is the same credit used to offset estate tax liability, but then I'm no tax professional.

[Incitatus]

33. That's why the amounts should be considered.

A person inheriting a million dollars is very different than one inheriting billions.

[SharonAnn]

11. I should I pay taxes on gains and not you or your kids? Why?

That's totally unfair.

Remember, the heirs DID NOT EARN IT! They just won the ovarian lottery.

Lottery winners have to pay taxes, why not you and/or your kids?

Why should unearned wealth received from an estate be the only income that is NOT TAXED?

I earn money, it's taxed (Soc Sec, Medicare, Income tax). Then I spend some of the disposable income to buy groceris and food, they're taxed. I put some in my savings and the interest I receive is taxed. I sell the house I bought with my taxed income and I pay taxes on the capital gains. Etc., etc.

[vadawg]

13. thats the question, how much tax should my kids pay, dont you think that people should be able to

provide for their kids if they want.. you say they did not earn it, so what i did and if i want to set them up should i be allowed to or should it be taxed to oblivion...

[kctim]

17. Good common sense

there VA. For the life of me, I cannot understand why people worry so much about what other people do or have.

[vadawg]

18. yup its like people think that because they didnt get stuff others shouldnt

or because they are not able to set their families up then others shouldnt, should someone be able to benefit from a life insuranc policy on a loved one if it means that they get a step ahead. I just dont get why people are so dead set against people leaving shit for their kids....

[rurallib]

21. No one is dead set against leaving shit to their kids

but when other monetary transfers incur taxes, why should this one be the exception? Do they not benefit by the system in which the money was accumulated and passed on? Should they not then support the system?

[vadawg]

22. no problem with some taxes being paid, my problem is that there are people who want 100% or close

i just dont get why people think (not you it seems) that i shouldnt pay for my kids college education upfront, have a trust fund set up to support them, and maybe even have a retirement fund, let them have property to klive in and as income generators all paid for from my estate...

[rurallib]

23. Got no problem with all that

With $3.5 mil excluded and 50% from there, I would think that should be enough even for the Duggers to survive on.
What kills me is that the media makes it seem that the likes of the Walton kids will be on the corner selling apples. Plus, the system has never in anyway benefitted them, so why should they pay?
The media has also portrayed estate taxes in such a way that EVERYONE will be paying them. So if you leave a modest bank account of say $10,000 the feds are going to take half and toss your kids into the snow.
$3.5 million is excluded. What percentage of Americans will even come close to that? 1, 2, 3%?
As with so many other things the media really twists this.

[vadawg]

24. yup but you know as well as i, that there are some who want no inheritence to be passed along

that all wealth should die with the owner so to speak....

[Incitatus]

34. Those some people are few an insignificant.

A 100% tax on all inheritance will never happen.

[Luminous Animal]

42. !00%! Ahahahahahahahahahahaha!!!!

Yes, "some people" might advocate that but there are also "some people" that believe in Big Foot. And yes, pay for your kids college education and then it's up to them to make it on their own in this meritocracy. Why should your inept children deserve anything more than anyone else's children?

[rurallib]

20. i think the first 3.5 mill per person ought to be enough to set someone up

and 50% or thereafter.
And why should those who benefitted from the system be exempt from paying for it?

[FLDCVADem]

49. Same here n/t

[Luminous Animal]

35. You should advocate for a society in which your kids should provide for themselves.

When you die, your kids are adults and if they haven't benefited from your largesse through their lifetime, then, in a meritocracy, they don't deserve anything else.

[HillbillyBob]

14. Is your estate going to be worth millions?

2 or 7 or whatever they set it at? Most likely you are worried about something that will never come to pass.
Leaving your 200,000 home to your kids is not going to incure 45% tax.

Too many worry about incomes/net worth that they are never ever going to achieve and so vote with the interests of the wealthy instead of us poor
joe schmos who are having trouble keeping the lights, food, mortgage current.

[vadawg]

16. im not worried about my estate, ive already got stuff all set up, its more a question to the people

who believe that noone should inherit from their parents as it gives them an unfair advantage, some think that even getting $500K for a house or college is to much for someone to inherit... so the question is more aimed at them...

[TicketyBoo]

39. I'll tell you one thing,

if I can't leave anything to my kids, then you'd danged well better bet that I won't have anything left when I die. I'll be sure to spend it all before I go.

That's why they're never going to hit the average Joe with estate taxes.

[kctim]

19. Thats like saying

I should vote against gay marriage because I will never marry a dude or vote against the 2nd Amendment because I will never own a gun.

[Johonny]

25. If you read any philosophy

estate taxes are a rational argument if you believe in the capitalist system.

[JetCityLiberal]

40. meh, not a surprise

progressive, liberal, still waiting for those posts.

Paul

up late on the east coast huh vadawg...

[napi21]

2. I didn't realize it had been increased to 7 million! I have a real

problem believing it would ever affect small farmers or even small business owners! That's the excuse the Pubs always use when they fight to have it done away with! 225 people out of a 300 million+ population doesn't sound like a big problem to me.

[SharonAnn]

12. A study be theorg representing farms found that NO FARMS had ever been lost due to estate taxes.

NOT ONE! NOT EVER!

The people who are really fighting for this are the Walton, who inherited billions from Sam Walton and want to pass on the gain tax-free, the Kochs (oil family), the Forbes, etc.

They're spending millions to get us to agree that we should pay taxes and they shouldn't pay taxes. They're special.

[The Wielding Truth]

3. Gees, you buy a pack of gum and there is tax. Billionaires should

pay what the rest of us do. More if they can. They have the ability to hire the best lawyers and are given all the perks of the wealthy,they should be responsible for their fair share of the cost to run this country. This do not deserve any more advantages.

[rurallib]

8. This is what those "campaign contributions" have wrought

sliding in little rules that have a huge impact. And of course these effects are seldom reported. When they are they are seldom reported accurately

[TicketyBoo]

44. Billionaires

pay the same tax on a pack of gum that you or I do.

Since most of us will never accumulate that kind of wealth, we won't have an estate tax hit our heirs, so we pay no estate tax.

It's the billionaires who will be hit with an estate tax. Since we aren't paying it, they don't want to, either. The difference is, they can well afford it, whereas we cannot.

It may have hit the Waltons already when Sam died.

Really wealthy people can (and do) minimize estate taxes by philanthropic means (charitable trusts and philanthropic foundations). They'd rather see their money spent in charitable ways of their choosing than have the government spend it. I can see their point.

That's as big a break as they should get, in my opinion.

[anonymous171]

15. It should be 99%. nt

[Odin2005]

26. IMO people should not be allowed to inherit any more than $10 million.

An aristocracy of wealth is incompatible with democracy.

[goldcanyonaz]

28. Why should heirs have to pay taxes on money that has already been taxed??

[DuckBurp]

29. How do you know it has been taxed?

Whether it has or hasn't is not at issue. The heirs haven't paid tax on it, yet. They shouldn't be allowed to acquire title tax free.

[Gormy Cuss]

31. Because they didn't earn it?

[eridani]

32. I have to pay tax on savings account interest that has already been taxed

Why should they be exceptions? Besides which, plenty of the loot is appreciation of capital gains which have never been taxed.

[Luminous Animal]

37. Because that money which is left over has not been taxed and they haven't earned it.

Once they've inherited it, they've "earned" it and thus, it is subject to taxation.

Do you have an issue with lottery winnings being taxed? Presumably, evey dollar that goes into a lottery ticket purchase is post-tax dollars.

[TexasObserver]

41. The estate tax isn't designed to produce revenue. It's about public policy.

Large accumulations of wealth are bad, and we should have public policy which forces large estates to be divided up or face substantial taxes.

I think moving the threshold up to a number which would take care of most family businesses or smaller concerns - say $10 million. I don't feel we should tax the first $10 million of estates at all. Above that, we need disincentives for failing to break up the wealth and distribute it.

As for the matter someone mentioned - the stepped-up basis in the value of the asset inherited - that is necessary because to do otherwise would force familes to divest themselves of some land to keep together their family farm or their family business. If Farmer Brown inherited the farm in 1969 from his father and mother, and in 2009 he passed it on to his kids, the tax hit without a stepped up basis on both occasions would have mandated selling a huge chunk of the farm.

I don't think the stepped-up basis rule should apply to any assets that are not tied to a residence, a farm, or a family business.

[TicketyBoo]

45. One thing to consider about that…

I don't think the stepped-up basis rule should apply to any assets that are not tied to a residence, a farm, or a family business.

It would wreak havoc with the stock market.

Let's say Warren Buffett knows his time is nearly up. He pulls all of his billions out of the stock market and pays capital gains taxes on it because his kids are going to have to, anyway, plunks the proceeds into the Gates Foundation, and then where are we? It would be like an earthquake hitting the stock market every time a major investor saw his time of death was close at hand.

It's beneficial to the stability of the financial system to be able to pass things on, unburdened by capital gains taxes. These heirs are likely going to have to sell things off to pay the estate tax. It would be a little unfair to hit them twice on the same gain.

[FormerDittoHead]

47. Now THERE'S a very good indicator that there are things very wrong with our system...

First off, changing the system, however it would be done, would be incremental.

But think about what you wrote. If ONE PRIVATE (not answerable to anyone) INDIVIDUAL could do ANYTHING to "wreak havoc withthe stock market" (and I'm not being funny with those quotes - your scenario is true) that would basically mean that some PEOPLE have become "too big to fail".

I would submit that there's something fundamentally wrong with the system when a single person would have so much unilateral power over our economy.

[TicketyBoo]

54. Well, it's not just Buffett.

He's just probably the most famous investor with that kind of clout, but he's certainly not alone.

I'm just saying that there are reasons why the limitation on capital gains for heirs makes sense. These big boys' heirs are already going to be hit with a hefty estate tax.

The limitation on capital gains is fairer for everyone. Imposing a capital gains tax would hit the big estates twice, and would effectively impose a form of estate tax on even small estates.

[COLGATE4]

48. In my opinion, the real resistance to keeping/enhancing

the Estate Tax is the thought way down deep in our being (the same thought, by the way that keeps people voting for the Rethugs against their clear economic interests again and again) that someday, somehow, someway we may win the Ovarian Lottery and get the big jackpot that the Estate Tax is designed to hit. Therefore, we are agin' it, damned Ol' Death Tax. If the actual numbers are looked at, it's hard to get too excited to think that a couple with an estate in excess of $7 million's heir(s) might be required to pay some portion in tax. The Rethugs have managed to 'popularize' a tax that 99.7 percent of us will never have to worry about dealing with. More smoke & mirrors.