Income taxes for everyone are not the only taxes that will jump up, should we jump off the fiscal cliff. The estate and gift taxes will also soar dramatically. George Will is sardonic about it:
If you have worked hard for five decades, made pots of money and now want to squander it all in Las Vegas on wine, women and baccarat, go ahead. If, however, you harbor the antisocial desire — stigmatized as such by America’s judgmental tax code — to bequeath your wealth to your children, this would be an excellent month to die. Absent a congressional fix before Jan. 1, the death tax, which is 35 percent on estates above $5 million, reverts to 55 percent on those above $1 million.
Rather than dying, many wealthy folks are giving their money away to their heirs, something else that will be heavily taxed after January 1. From CNN Money:
Currently gifts and estates of up to $5.12 million are exempt from taxes, but as part of the fiscal cliff, any portion of a bequest that exceeds $1 million will be taxed next year — and at a 55% rate (currently, the rate is 35%). That will kick in unless Congress and the president agree to extend the current exemption or agree on a new one. Many older Americans are not waiting to see if that happens.
“It’s crazy,” said Richard Behrendt, Director of Estate Planning for Baird’s Private Wealth Management. “I bet more wealth is transferred this year than in the past 10 years combined.”The drop to a $1 million exemption means that the tax bill on gifts or estates of $5.12 million will go from zero this year to $2.266 million next year, according to Blattmachr.
Jonathan Blattmachr, a principal of Eagle River Advisors in New York who has lectured groups of estate planners about the expiring exemption, said the amount given away in 2012 will be three or four times that of any other year.
What do you think about the estate tax? One strain of puritanism has always disapproved of the “idle rich,” such as those trust fund kids on Lifestyles of the Rich and Famous jetting to Monaco and other of the world’s playgrounds. The thought is, people should earn their wealth by hard work, not just live off of the hard work of their forebears.
Then again, inheritance is related to the unity of the family across generations. Also, those with inherited wealth are not necessarily “idle,” since they usually have to keep the family business in good working order.
The inheritance tax is often devastating to farmers and owners of small businesses. Farmers are often cash poor, but land rich. That is, the soaring price of land makes them wealthy on paper, in terms of assets, but they don’t necessarily have much actual money. Frequently, when the landowner dies, the farm has to be sold to pay the estate taxes. The heirs don’t have that kind of money even if they want to continue the family farm. The same can hold true for small businesses, which often have to be dissolved upon the death of the owner when the heirs can’t come up with the cash to pay the inheritance tax.