Subject: Wealth Effects of Estate Taxation Date: Tue, 01 Jun 1999 22:51:37 +0200 From: george royle Organization: Law Office of George Royle Newsgroups: sci.econ Hi. Researching wealth effects of estate taxation. Any suggestions as to whose work I should read for a concise explanation of the incentive NOT to create wealth resulting from an aggressive estate tax scheme? George Royle NYU School of Law groyle@hotmail.com Gary Forbis wrote: > > The first $600,000 is not subject to inheritance. For most of us this about > covers it. Hi, That is approximately correct. But when people have this much in their estate, they can afford to pay a financial advisor to set up a trust in such a way that the money is transfered to their kids (or whoever) without being subject to the eatate tax. >..In more recent times some areas have assets in the form of > houses that approach this amount. If you want to take care of this problem > you sell the house to your kids and rent it from them. And of course you can sell it to them at a bargain rate. That sort of thing is just the "tip of the iceberg". There are so many ways around the tax, it would be interesting to see if it collects any money at all. I have been told that the estate tax exists just to make egalitarians happy that "the rich" will be punished, and to insure that lawyers and estate planners will have business. "William F. Hummel" wrote: >Internal Revenue Collections in 1996 in percent of total: > Corporate income taxes 12.5% > Individual income taxes 47.7% > Employment taxes 35.7% > Estate and gift taxes 1.2% > Excise taxes 2.9% > Source: 1999 NY Times Almanac > > It might be well to bear in mind that the number of those dying > every year is a small fraction of the income earning population. Hi, Interesting data. And while they may be a small fraction of the "income earning population" (since most are retired), I bet they "owned a pretty high fraction of the total assets". I use the past tense, since technically, most who die "own" less than $600,000: the amount you need to be under to avoid the estate tax. But I bet their trusts contained a lot more asset value than they "owned" when they died. Hey, that is why we have financial planners. -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 AND FROM THE GRINCH: There are empirical studies indicating that the estate tax actually loses money for the Treasury because it gives wealthy individuals who are in the top income tax bracket a strong incentive to move assets (and the income earned on them) before death to younger family members who are in lower income tax brackets. Meanwhile, nobody pays estate tax except those who neglect to plan for it. That eliminates almost all the very rich who regularly use professional tax and financial advisors. The typical taxpayer is a fairly successful middle-class person who doesn't think of himself as "rich" but who underestimates how easily things like life insurance proceeds, the value of a retirement account, and unrealized appreciation in a home, other tangible assets and/or a small business can add up to more than the exempt amount. Or who dies sooner than he expects, before getting around to putting together an estate plan. Meanwhile the tax scheme produces very substantial revenue for bank and investment house trust departments, accountants, financial planners, and legal leeches like myself. (I admit to having sucked some blood, er, earned some income in this area.) It also causes very substantial amounts of assets to be "redeployed" in what the original owner considers to be a second-best manner, albeit better than having the government take half of them. If a binary "keep or kill" decision were to be made about the existing estate tax, I'm sure the polity would be better off without it. However, personally, I'd just like to see it be made more complicated. AND: From: susupply@aol.com (SUSUPPLY) Newsgroups: sci.econ Subject: Let's see, Gore fights for working families, so.... Odd that this is on the NY Times opinion page, but it is: http://www.nytimes.com/2000/09/21/opinion/21HERZ.html << Rich? No, Frugal. By Stanley Herz SOMERS, N.Y. After my mother-in-law died nine months ago, my family found itself among the 2 percent of Americans required to pay an estate tax. Suddenly we are among those whom President Clinton and Al Gore tag as "very rich." But my wife's parents hardly lived an elite life. It is a leap to equate all the people required to pay estate taxes - those whose assets exceed $675,000 - with the very wealthiest Americans. As Gene Sperling, the president's economics adviser, has noted, half of all estate-tax revenues come from the top one-tenth of 1 percent of estates - the assets of the truly wealthy. I suspect the rest of the families are much like my wife's. Elsa and Peter emigrated to New York from Germany in the 1930's as newlyweds. They came with few possessions and even less money. They worked first in a joint endeavor, sweeping a movie theater together for minimum wage. Elsa graduated to cleaning houses and then to working as a hospital phone operator. Peter became a sales clerk. By 1940, they had entered the lower middle class, occupying a two-bedroom, fourth-floor apartment in the Washington Heights section of Manhattan. Since the eventual value of their assets put them in the ranks of the exceptionally rich - or so the sound bites would imply - the next chapter in this story might be expected to feature my in-laws starting an enormously successful company. In fact, Peter remained a sales clerk until his death in 1989 at 87, and Elsa retired from 40 years of answering phones. She died in the same fourth- floor apartment the couple had first occupied 55 years before. In their lives, they owned one car, a 1960 Dodge. Their daughter (my wife) worked from the time she was 16. By living frugally, Peter and Elsa managed to put away a few dollars every month, investing in what they considered to be safe stocks. (AT&T was their largest holding.) When my father-in-law died, the savings were a cushion for his wife, but not even on the radar screen of the estate tax threshold. His widow, then approaching 80, was satisfied to have the cushion to provide for contingencies (read: nursing home). And near the end of her life, when it was clear that she wouldn't outlive her assets, she was proud she would be leaving money to her daughter and grandchildren. Then the stock market took off, and now my wife is about to give Uncle Sam a big chunk of Peter and Elsa's lifetime investments - more than a third of everything over $675,000. (The tax is graduated, with a top rate of 55 percent.) If my in-laws had been among the really rich, they would have had a coterie of tax lawyers setting up trusts to shield their heirs from a portion of the tax bill. Instead, like most people with middle-class lifestyles, they had a plain-vanilla approach to financial planning. Most children and grandchildren who must forfeit part of an inheritance are from similarly middle-class families where assets arose from hard work and steady savings - family values that shouldn't be penalized.>> REPLY: From: Grinch Newsgroups: sci.econ Subject: Re: Let's see, Gore fights for working families, so.... Date: Sun, 24 Sep 2000 17:32:25 -0400 On 24 Sep 2000 19:04:03 GMT, mwitte@merle.acns.nwu.edu (Mark Patrick Witte) wrote: > This piece would have been far more interesting if the author had >volunteered actual numbers for taxes owed. > > The $675,000 exemption is per person so I think it would be doubled >for the dissolution of a two person estate. Nope. Not if, as here, one spouse leaves all his/her assets to the other through an "I love you" will -- probably after hearing all his life that estate transfers to a spouse are "estate tax free". Then one of the exemptions is lost. >Further, as the author admits, >the real source for the size of the estate was the rise in the stock market, >so was the result primarily of previously untaxed capital gains. Well, if the rise of the stock market savings occurred within the couple's retirement savings accounts -- IRA, Keogh, 401(k), etc., -- then all the money is subject to *both* income tax ("income in respect to a decedent") and estate tax. This savings pattern is a typical case for frugal lifetime savers, and also for persons who roll over their lifetime retirement savings from an employer's retirement plan into their own IRA upon leaving an employer. Very common. Moreover, the income tax on capital gain then is kicked up from capital gain rates to normal rates, and the 39.6% top federal rate can easily apply even if the savers were low-wage people who were never taxed at more than 15% when alive, as the accumulated income can all be taxed in one year. Also, the decedent generally is held to have zero cost basis in the stock, so 100% of its entire value (not just the "gain" over purchase price) is taxable as ordinary income. Then you have to add in state and local income and estate taxes as well, as both also apply. The combination of income and estate tax, federal and local, can easily exceed 90% tax on the portion subject to estate tax -- (100% if you are lucky enough to live in a place with high local taxes like NY -- as here). There's no kind of offset for one tax when paying the other in the typical case -- e.g. if an estate takes money out of an IRA to pay the estate tax on the IRA, it can't claim the money isn't income to it because it is gone for estate tax. The amount subtracted for estate tax is taxable income to it too -- a true double tax. And one can accelerate into the higher top tax brackets *really fast* by making the very common mistake of lovingly looking after a kid or someone else by buying and owning some life insurance (maybe to cover the estate tax one figures one might owe). Then the life insurance is subject to tax too, winds up financing the tax on itself, and pushes everything else up into higher tax brackets because of the extra money involved. Maybe this is the kind of surprise Ben Stein was complaining about? Of course, all this is entirely avoidable *if* one knows how to plan to avoid it -- which no layperson could possibly do, so one needs the e-mail address of a competent professional who is familiar with the issues. ;-) The ease of avoiding estate tax on even really huge estates is readily evidenced by the generations of Kennedys, Rockefellers, DuPont's, Fords, Forbeses, etc., who continue to live prominent, plush lives, happily subsidized by great-grandpa's money. But of course, those families employ well-paid crews of professional tax pilots to safely guide great-grandpa's wealth through the tax rapids. OTOH, the typical person who gradually builds wealth through retirement savings plans has heard all his life that these plans are "tax favored", not "double taxed" -- and so very often thinks the family is provided for by the balance in them, with no other provision necessary. Add in some mispurchased life insurance, appreciation on a home that the mortgage was foolishly paid off on (instead of refinanced, to eliminate taxable equity), and it's very easy for the lifetime family-oriented saver to go crunch on the rocks at a very high tax rate. And I won't even mention a surprise IRS valuation of a family business, and the traps there. >There are a lot of problems with efficiency of the estate tax, Yes, indeed there are. A little while back George Soros wrote an op-ed piece in the Times in defense of the estate tax. He said both that he himself had planned away his estate liability with the help of his advisors, showing that the estate tax isn't a real burden because that can always be done, and also that voters should support the tax because it is progressive since it affects only rich people like him. I thought that was amusing. IIRC, I have in my files a paper by Summers from his pre-governmental days in which he argued that the estate tax was a net money loser due to the low nominal revenue it collects, its high efficiency cost, and the fact that it substantially reduces income tax collections by motivating high-income-tax-bracket individuals to move income earned on their assets into lower income tax brackets as a consequence of estate-tax-reducing planning. >more propaganda than analysis. Well, of course, it's an election year. We'll be able to say the same thing about everything Krugman writes until after he's left out of the next Administration. AND from Grinch to sci.econ Tue, 29 Oct 2002: I also enjoy watching Edward and the other Kennedys talk about how we need to keep the estate tax to prevent (1) undue accumulations of inherited wealth that (2) heirs could ride to obtain undue political influence. It's always so amusing. A very interesting fact about the estate tax is that the rate of tax paid goes *down* for the wealthiest estates. Taking a quick look at the IRS Statistics of Income at www.irs.gov, for the most recent year readily available, the overall effective tax rate for the total >$20 million group was 14.6% -- the *lowest* rate for any group with assets over $2.5 million (which is about where the tax becomes meaningful for a married couple) And in there were 88 estates with assets totaling $4.6 billion that paid a grand combined total estate tax of zero dollars ($0). So we can see that the estate tax is no threat to the Kennedys (or Buffets or Gateses) or other billionaires who publicly sign on in support of it. From: Jim Blair, April 13, 2006 Just yesterday I read in Barbara Quirk column in our paper that: "There are huge amounts of wealth being passed from one generation to the next for those few in the upper 7 %--some $200 billion annually." The amount of estate and gift tax collected in 2005 was $24.7 billion according to http://www.fms.treas.gov/fr/05frusg/05stmt.pdf. So would that mean the average government take on that upper 7% would be 12.5% of the amount being transferred, assuming that no money was collected from the lower 93%? If the estate tax is supposed to be at or over 50% of money over the exemption limit, and these are large estates, it sounds to me like someone is finding some loopholes. AND: Is the estate tax regressive? jeb: >> But yes, it is regressive if it collects more from "small" estates >> than from "large" ones. Tony: > > >Yes, _if_. Two things you'd better clarify, Jim: > >1) Are you talking in the aggregate? Are you saying that more total money >is collected from all small estates than from all large ones? S Doo: IRS Statistics of Income show that the largest estates pay a lower effective tax rate than smaller estates. Easy enough to see at www.irs.gov Tony: > >2) You are on your deathbed with a net worth of $10 billion. You give $9 >billion of that to a foundation dedicated to providing clean water to >African villages. What is the size of your "estate", as you define >"estate"? Daddy owns a billion dollars of stock in a company he founded, lets call it something fictional like "Hewlett-Packard" Daddy is actually quite Scrooge-like and keeps that money productively invested in business, taking relatively little out to consume -- after all, that's how he became a self-made billionaire! When Daddy dies his taxable estate is worth a billion dollars. But he can easily enough avoid estate tax on it by leaving his stock in the busisiness to his own charitable foundation, created to promote environmentalism and fight population growth. As it happens, Daddy names Junior as manager of the foundation, and other family members join in running it. The tax law allows Junior & Relatives to charge the foundation the going market rate for managing its billion dollar portfolio and making all those important related decisions -- and low and behold, by doing so they take more money out of their stock holdings than Daddy ever did. Moreover, as the foundation continues to hold all that HP stock, rather than diversify into a much safter index fund, Junior and Relatives remain as directors of H-P the business, getting paid amply for that, and having real influence in operating the business. Also, since those who distribute the income on a billion dollars naturally enough get many gifts and considerations from those who seek to receive it, Junior and relatives get a lot of, um, Holiday turkeys and tickets to the opera, and invites to all the best society parties. Junior in fact gets quite the repuation for being a jet-setting playboy (and also as a "no show" director of the business -- until someone proposes a merger for it that would dilute his managerial influence!) Also, as the foundation and the operating company both develop related organizations (profit and non-profit) and have relations with many others, and all these organizations must hire people, there are other well-paying jobs aplenty for Junior and Relatives and the other younger relations across the family, without particularly strenuous work requirements. And as the Tax Code requires that the foundation distribute only 5% nominal of its assets to actual charity each year (and many of its costs paid to family members are included in this 5%!) not much of the environment need by saved by it, and the population can fall pretty much on its own -- as the principal of the foundation accumulates indefinitely. Which enables the whole family to live like a billionaire family, not being able to actually sell the foundation's stock for their own account itss true -- but in all other ways taking a heck of lot more income out of the stock, and receiving a whole lot more billionaires's perks, than if Daddy was still alive, * or* if the billion had been left taxably and been cut by 50% each generation. Did you ever wonder how all those Kennedys who flunk the bar exam and have otherwise poor academic records always seem to be employed by conservation groups and non-profits that leave them with plenty of time and income to enjoy politics and playboying, generation after generation after generation? And as to Warren Buffett's well known claim that his children will have to "work for a living", they are already working for the family foundation he's set up to inherit his stock. jeb: >> I don't object to the estate tax because it is regressive. >> I object because it is a jobs program for lawyers Tony: > >Jim, this is a truly warped conception. If you're a billionaire, it's not >the estate tax that makes you hire lawyers. It is your intense, passionate >desire to _avoid_ the tax which makes you hire them. Gee, you make it sound unseemly, a failure of character even, to take steps not to pay more tax than you legally owe. If you are a mere thousandaire, is it your intense, passionate desire to _avoid_ tax that causes you to hire a CPA, or pay for Turbotax, to assure you don't pay more than you legally owe? AND this from William F. Hummel:4/24/2006 jeb: >I don't >object to the estate tax because it is regressive. I object because it is a >jobs program for lawyers who are already well above the average in income >and wealth, and it probably reduces the federal government's income. WFH: Quite true. If I were a lawyer and seeking an easy way to wealth, I think I would specialize in estate planning and settlement. Those are two different activities, i.e. front end and back end, and the back end is where most of the money is made. Estate planning very often involves the creation of a trust document which a lawyer can do with minimal time and effort. Once the basic form of a few types of trust documents are created on his computer, he can use them again and again for his clients. Only a small portion of the document will be unique to each client, and a paralegal can do much of the work. In contrast, estate settlement can be quite a forbidding chore for the surviving trustee and the successor trustees when he/she dies. All of the real and financial assets of the estate must be itemized and valued, real estate and businesses appraised, and all of this reported on a complex filing to the IRS. This assumes the estate value exceeds the exemption limit, otherwise no filing is required. The trustee responsible for filing will almost always hire a lawyer and/or accountant to deal with these tasks. This is where the professional hours pile up, and an unscrupulous lawyer can easily pad the billing at a not atypical $350 per hour. A complex estate may require weeks of time to organize for the filing and settlement.