Chart: Only .5% of US Estimated to Pay Estate Tax (and other op-eds for reform)

Category: Estate and Inheritance Tax

September 6 is when Congress comes back to take up the question of repeal of the Estate Tax. A recent report from the Congressional Budget Office shows that for all its publicity as the killer of small business, the federal estate tax impacts a miniscule portion of the population (see recent Y&Y post). From all my reading, my position is neither for or against repeal - instead, I question in what manner the lost revenue will be made up? One thing is for sure - the government needs money to operate, it currently doesn't have enough, and at some point the tax will be coming to all of us to make up the difference. If not through the estate tax, fine; but don't kid yourselves into thinking that when the dollars brought in through the estate tax go away that the need for those dollars will also go away.

Two recent op-eds questioning the need for repeal:

Death Tax? Double Tax? For Most, It's No Tax - New York Times


"A report last month by the Congressional Budget Office found that in 2000 only 2 percent of all estates - about 52,000 - were subject to any estate tax. At that point, taxes were imposed only on estates worth $675,000 or more. The limit rose to $1.5 million in 2004, and if that limit had been in effect in 2000, only 13,771 estates - fewer than 1 percent - would have been subject to the tax. All but 740 of them would have had enough in liquid assets to cover estate tax liabilities, the office estimated."







Fix Estate Tax, Don't Gut It - Wisconsin State Journal


"The federal estate tax ought to be reformed, but the super-rich should not get off virtually tax-free. That's why the Senate should adjust its aim as it works on a compromise reform plan."

Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper

Category: Estate and Inheritance Tax,

The Congressional Budget Office (the "CBO") is a non-partisan entity charged with providing Congress with objective analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process.

The CBO has just issued a new paper, Effects of the Federal Estate Tax on Farms and Small Businesses (a .pdf link). As a non-partisan entity, the CBO does not make recommendations; instead, in analysis actual information, sans spin.

Whether you support or oppose the repeal of the federal estate tax, I find it interesting that the claim that "the death tax is killing America's small businesses and farms" is so widespread, when the actual impact of the estate tax on those same small businesses and farms is so minimal (e.g.: between 1999 and 2000 a TOTAL of 302 actually could have been negatively impacted by the claim that the "death tax kills small business".)

Some facts culled from the paper:

• "In recent years, fewer than 2 percent of all estates have
  had to pay estate taxes.
  
  "CBO's analysis examined data from estate tax returns filed in 1999 and 2000
  (the most recent data available when the analysis was conducted). Determining from tax returns what constitutes a family farm or small business is difficult, however...For lack of better identifiers, this analysis considered the estates of farmers to be those reporting an occupation of either farmer or farm worker (about 4,500 estates per year) and the estates of small business owners to be those claiming the QFOBI deduction (about 1,500 per year)." [Note: So, the total persons possibly impacted by the estate tax out of the entire United States population in this two year period is 6000.]
  
  
• "The vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed. However, estates involving farms or small businesses were less likely than the average estate to have sufficient liquid assets to cover their estate taxes. In 2000, about 8 percent (or 138) of the estates of farmers who left enough assets to owe estate taxes faced a tax payment that exceeded their liquid assets, compared with about 5 percent of all estates that owed taxes. For estates claiming the QFOBI deduction, the corresponding figure was about 34 percent (or 164 estates). Those numbers are upper bounds, however, because the definition of liquid assets used on estate tax returns excludes
  some money held in trusts, which could also be used to pay estate taxes.: [Note: So the maximum number of people who possibly could have had to sell the family business to pay taxes is 302.]
  
  "For returns filed in 2000, the threshold for filing was gross assets worth at least $650,000 or $675,000, depending on the year of death—less than half the 2005 level of $1.5 million. Had the current filing threshold been in effect in 2000, far fewer estates, especially those of farmers, would have had to file estate tax returns."
  

The balance of the paper is an excellent summary of the history of the estate tax, a numerical analysis of its impact on the 302 families described above, as well as analysis of the impact of repealing the tax versus raising exemptions. While it is fair to note that much of the study is by nature subjective (does the existence of an estate tax suppress entrepreneurialship?), the balance of the study definitely suggests that the public belief that the "death tax kills small business" is blown way out of proportion.

Federal Estate Tax Compromise Solutions - One opinion from the NY Times

<Category: Estate and Inheritance Tax

A New York Time editorial dated August 8, 2005 entitled The State of the Estate Tax highlights issues in the current estate tax repeal to date. The editorial takes the position that in an era of huge federal deficits, a total repeal of the federal estate tax would be unlikely. The editorial goes on to describe how the US Senate plans to take up the debate on the repeal of the federal estate tax when they return from summer break in September, and focuses on a critique of the compromise solution offered by Sen. Jon Kyl of Arizona (Republican).

Mr. Kyl's approach is two-fold:

• An increased personal exemption from federal estate tax to $3.5 million (which would in effect be $7 million per married couple).
  
  The editorial states that "With an exemption of $3.5 million, only the top 0.3 percent of estates would be subject to the tax. Huge estates are precisely those that should be taxed most heavily, because the larger the estate, the more likely it is to be made up of investment gains that were never taxed during the owner's lifetime."
  
  This comment refers to the little publicized fact about the "step-up in basis" available at death. Under Section 1014 of the Code, when a person dies, their heirs receive a "stepped-up" basis in inherited assets (with some key exceptions, such as retirement plan assets). The heirs' basis is the fair market value of the assets on the date of death (ie: the basis is "stepped-up" in value to the fair market value). Section 1014 thereby effectively wipes out any tax on unrealized appreciation during the person's lifetime. In this light, it can be argued that the estate tax acts in lieu of the capital gains tax.
  
  
• A reduction in the estate tax rate to 15%, to make it equivalent to the capital gains tax rate. In the limited context of describing the purpose of the estate tax as replacement to the capital gains tax, this makes sense. However, the editorial goes on to point out that:
  
  
  "Mr. Kyl contends that a 15 percent estate tax rate is fair, because it is the same as the capital gains tax rate that is applied to investment profits during one's lifetime. That's a false comparison. The capital gains tax law does not allow you to exempt a huge portion of your profits before the tax rate is applied. The estate tax law does. Once the $3.5 million exemption and other deductions were factored in, a 15 percent tax rate would translate into a mere 6 percent levy on a $20 million estate."
  
  
  Another concern with describing the estate tax as replacement to the capital gains tax is that it oversimplifies the role of the estate tax. There are other theoretical underpinnings of the estate tax such as acting as a backstop to lower income tax rates during lifetime (allowing you to spend more during your life, and saving the timing of the tax until your death and basing it on what you did not spend during your life), as well a belief in a progressive tax system where the share of those with more dollars is greater.
  
  

The editorial misses another underlying benefit of Mr. Kyl's solution over outright repeal. If the federal estate tax were repealed, Section 1014 and the "step-up" in basis would no longer function in the relatively simple manner they do today. Under current law, your basis in inherited property in the fair market value at date of death. If an estate tax return is prepared, this is a simple matter of looking up the basis, even years later. If there is no federal estate tax, then Section 1014 would not wipe out unrealized gains during lifetime (subject to a blanket granting of basis under the law - ie: at death you can apply $1 million of basis to any estate assets, or something along those lines). This means that when you go to sell the inherited GM stock, you may need to figure out what the decedent paid for it - which will often be an impossible task. The result is that people may end up paying more capital gains tax then should be assessed if they cannot prove the basis of the assets sold. Most estate planners see this as a nightmare waiting to happen as people will need information that only a dead person may have. By keeping the federal estate tax, but tying it more closely with the capital gains tax, Mr. Kyl's proposal avoids the basis tracking issues.

Having said that, the estate tax repeal debate should really be stripped of all ideological underpinnings and approached from a practical and business-like manner. Fact: The estate tax brings in dollars today. Fact: The government needs those dollars to operate today - there is an astronomical federal deficit. Question: If the government no longer takes dollars from the estate tax, and given that it still needs those dollars to operate, how are those dollars being replaced? You can be sure the dollars will come from somewhere - just because the estate tax is repealed doesn't mean that taxes are repealed. These are the questions that need to weighed. From this approach, some people may find they prefer a tax that focuses on what you didn't spend before you died.

Vote on Estate Tax Repeal (a/k/a "The Paris Hilton Benefit Act") Postponed Until Fall

Category: Estate and Inheritance Tax

From Vote on Estate Tax Repeal Likely in Fall - Elder Law Answers Articles: "Senate Majority Leader Bill Frist (R-Tenn.) has postponed a vote on repeal of the estate tax until September, but lawmakers are likely to take up measure shortly upon returning from their August recess.

The Death Tax Repeal Permanency Act of 2005, which would repeal the estate tax permanently beginning in 2011, passed the House earlier this year by a 272-162 vote. However, Senate Republicans probably lack sufficient votes to block a Democratic filibuster of the measure, which its opponents have dubbed 'The Paris Hilton Benefit Act.'

The decision to delay the vote gives more time for compromise negotiations between Senate Finance Committee ranking minority member Max Baucus (D-Mont.), and Senate taxwriter Jon Kyl (R-AZ), according to Cowles Legal Systems.

Sen. Kyl has proposed a compromise that would make the estate tax rate equal to the capital gains rate, which is currently 15 percent, and exempt from taxation the first $3.5 million of an individual�s estate ($7 million per couple), with the exemption amount indexed to inflation in years after 2010. (Under current law, the per person exemption amount is $1.5 million in 2005, rising to $3.5 million in 2009.) The Center on Budget and Policy Priorities estimates that the Kyl proposal will cost the nation $595 billion between 2012 through 2021. Sen. Baucus has not yet presented an alternative proposal.

Repeal of the tax would mean that while the wealthiest Americans still cannot escape death, they will be able to avoid that other inevitability. The estate tax currently affects only the richest 1 percent among the deceased, those with inheritable estates worth more than $1.5 million. The Center on Budget and Policy Priorities estimates that after taking account of deductions an"

Federal Estate Tax Exemption to $2 million in 2006 - Effect on NJ Residents

Category: Estate Planning, Estate and Inheritance Tax

The Federal Estate Tax ("FET") Exemption amount is currently scheduled to increase from $1.5 million to $2.0 million on January 1, 2006. While Congress has a September agenda item to hammer out a permanent repeal of the FET, NJ residence should understand what impact the increasing FET exemption may have on them.

On one hand, a sign of relief can be made by those with more then $1.5 million in assets and less than $2.0 million ($3.0 million and $4.0 million for married couples with a properly planned estate) - FET will no longer be a worry. On the flip side, the New Jersey Estate Tax ("NJET") will play an even larger role. The Exemption from the NJET is frozen at $675,000. This means that only those estates valued at less than $675,000 escape estate taxation in New Jersey. In 2005, an estate of $1.5 million is exempt from FET, but owes NJET of $64,400. In 2006, an estate of $2.0 million will be exempt from FET, but owe NJET of $99,600.

There is no cap on the NJET. As your assets increase, so does the NJET. Also, the NJET does not depend on the FET. If there is no FET, a NJET will still be due and owing.

Many steps can be taken to reduce the bite of the NJET - including gifts, creating exemption trusts in the wills, life insurance planning, and more sophisticated techniques. Unfortunately, many New Jersey residents don't think ANY estate tax applies to them since their assets are below the exemption level for the FET. Or, they confuse the New Jersey inheritance ("NJIT"), which exempts lineal descendents and spouses from tax, from the NJET, which only exempts assets passing to spouses from taxation.

Many clients come to our offices thinking the NJET is not such a big deal - but starting 1/1/06, you can pay no FET and have to write a check to NJ for $99,600 - that is a lot of real money that could go to your family with proper planning instead of the State.