If you have a big estate, die or give it away by January 1

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.

via George F. Will: Fixing the tax code at the cliff’s edge – The Washington Post.

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.”
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.

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.

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.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • http://theoldadam.com/ Steve Martin

    The government will make good use of that extra money. They will use it to destroy the incentive of many other people, and they will squander it with fraud and waste (most of it).

    So be thankful that it is going to a ___ cause.

  • Spaulding

    The estate tax is just another class warfare strategy used by politicians to get votes. It like so much of the tax policy in comes from envy and the desire to use the tax code to punish people that are “too successful”.

  • Ed

    While different people have different motives in supporting the “death tax,” in Karl Marx promoted it as a way to move capital from the individual to the collective. The amazing thing is that many believe that they are actually taking from the wealthy to give to the poor and that greed is the only motive for those who oppose inheritance taxes.
    While communism and socialism sound attractive with “from each according to their ability; to each according to their need,” the actual track record is poverty for the masses and power and wealth for the nomenclatura.

  • Barbara T.

    It’s out right thievery by the government of its citizens.

  • Michael B.

    “What do you think about the estate tax?” “Currently gifts and estates of up to $5.12 million are exempt from taxes”

    Someone on here has noted repeatedly that income taxes are rather high, but wealth taxes tend to not be as high. Shouldn’t it be the case that somebody who actually makes multi millions be taxed at a similar rate as someone who inherits it?

    Also, I’ve said this before, but I just stand in awe of the super-rich being able to convince so many middle class Americans that their interests are somehow aligned.

  • SteveD

    If more small business owners and farmers would incorporate and work their heirs into the corporate structure, a lot of the grief over taxes would be moot. I know – this is what my dad did with our farm.

  • Joe

    “Shouldn’t it be the case that somebody who actually makes multi millions be taxed at a similar rate as someone who inherits it?”

    No because that wealth was already taxed when it was the decedents income or capital gains. The estate tax is simply a way to tax the same money twice.

  • rlewer

    #5

    Someone who owns a farm or business that is “valued” at one million is not “super rich.”

  • dan kempin

    This calls to mind the fable, “Avaricious and Envious.” (Also “The Wolf and the Lamb.”)

    This is fun!

    (I’m assuming that the readers have at least checked in on the other posts.)

  • http://enterthevein.wordpress.com J. Dean

    Never understood the mentality that society automatically deems themselves the arbiter of anybody with substantial personal wealth.

    Call it me, but that sounds like a violation of the seventh commandment.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Also, I’ve said this before, but I just stand in awe of the super-rich being able to convince so many middle class Americans that their interests are somehow aligned.

    Well the interests of the middle class are certainly more aligned with their fellow taxpayers, the super rich, than they are with those who are not paying taxes but receiving benefits paid for by tax payers. Those who pay a little and those who pay a lot are both paying. Those who are receiving are the opposite.

  • Lou G.

    Will makes an excellent point when he writes, “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.”
    I see many, many retired people in my family and community who have made the decision to spend their inheritance on themselves in retirement – extensive travel, buying cars, eating out, going to expensive affairs, etc.. They are using their wealth to lavish upon themselves and they are also making life decisions (like divorce, etc) in order to protect their financial assets.
    Clearly, this inheritance tax going up to 55% will just be the icing on the cake to ensure that the next generation gets nothing handed down to them but debt from the selfish, aging boomers.

    History will not be kind to the baby boomer generation. And the even more self-centered, spoon-fed, spoiled-rotten generation of millenials are in for a huge wake-up call.

  • SAL

    I think this is in part motivated by the Democrats’ distaste of family businesses.

    My opinion the government has no business stealing things that a father gives to their children even if it’s a large farm or company.

  • http://facebook.com/mesamike Mike Westfall

    Can’t inheritance taxes be mostly avoided by placing assets into family trusts, since then it is the trust, and not the individual that “owns” the estate?

    Of course, there’s probably a big tax hit to take just transferring assets into the trust, too.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    History will not be kind to the baby boomer generation. And the even more self-centered, spoon-fed, spoiled-rotten generation of millenials are in for a huge wake-up call.

    Will the millennials be kind to the boomers in retirement? Or will they vote for programs that return more tax dollars to them for everything from college tuition to health care? Will they be pleased with a Medicare oversight board that will deny coverage for all kinds of expensive medical procedures and treatments for folks over a certain age?

  • Klasie Kraalogies

    What is the tax on transfers of assets to family members / into trusts, or the incorporation of a family business, prior to death?

    It would seem that incorporating the family business is a viable alternative, for many reasons including bankruptcy protection (as per SteveD @ 6).

    As the past shows, there is almost always a way around these things.

  • DonS

    In an ideal world, I’m of a mind that estates should not be taxed or only lightly taxed, if the estate is passed to other immediate or closely related family members. After all, the money was taxed the first time it was earned, and all you are doing is transferring that money within the family. If it is passed to unrelated people, or perhaps to only distant family members, then it should be taxed at ordinary income rates.

    However, we do not live in an ideal world. We live in a world where the government is consuming about 45% of total GDP and is borrowing, at the federal level alone, about 7% of GDP. It is currently taxing, or planning to tax, earned income at historically high levels. This kind of taxation is a great disincentive to productivity, and a serious deterrent to the opportunity for hard working people to accumulate any significant level of wealth.

    In view of that, and the fact that the very rich in our society are advocating, and even applauding, this heavy taxation of productive people, I think we should reconsider our taxation burden. As I said above, I don’t see any reason to protect unrelated people who receive an inheritance from ordinary income taxes, just as they would pay if they had received the same amount of money through their own labor. For family members, I would completely exempt the first $5 million. Above that level, liquid assets would be taxed at ordinary income rates, and illiquid assets would be passed to the beneficiary with a zero basis. They could hold onto that asset (i.e. a family farm) and continue to work it without paying taxes, but when they sold it, they would be responsible for capital gains on the entire sale price.

  • Klasie Kraalogies

    DonS, I’m not opposed to the Capital Gains approach, but here is a question: If a person dies, and the farm gets passed on to his son/daughter, and that individual dies and it gets passed on to the next generation, which then decided to sell it – on which value are you going to calculate capital gains? On the value at the time of the grandfather’s death? Or are you going to “reset the value” every time it gets passed on?

  • DonS

    Klasie, my thought is that as long as the property or business or other illiquid asset stays in the family, it passes tax-free until it is sold. Its basis is zero, and would remain zero when it passed again. The idea, of course, is that this would prevent a family from having to sell the farm when Dad died. More to the point, it would encourage them not to sell. When they did sell, the government would get its cut. A full cut, on its entire value.

    Of course, with the $5 million exemption, if there are less than $5 million in liquid assets, then the family could opt to pass illiquid assets through under the exemption, i.e. assign the remaining value of the exemption to offset a part of the value of the property — this would become its basis.

  • Klasie Kraalogies

    DonS, so that is not exactly Capital Gains tax then, but a sort of delayed inheritance tax.

  • DonS

    Klasie @ 20: I’m not sure what you are referring to. The illiquid asset, such as land, stock, family store or other business, is typically going to be a capital asset, so when sold it would be taxed under the capital gains laws. What I am saying is that current law taxes that asset, like all other assets, under the inheritance tax schedule, immediately, subject to the estate exemption, which is currently $3.5 million, but will be $1 million next year under current law. I would do away with the inheritance tax schedule and tax inheritance as ordinary income or capital gains, depending upon the nature of the inherited asset, subject to an exemption (I suggested $5 million) for close family, but without exemption to unrelated or only distantly related beneficiaries.

  • Klasie Kraalogies

    DonS, but capital gains is calculated on the increase in value (hence the word “gains”) of an asset, from the time of acquisition to the time of disposition. Thus to say “total value” makes this not capital gains, but just “capital”.

  • DonS

    Klasie @ 22: The gain is from zero to the sales price. The basis is zero. It’s still a capital gain.

  • Cincinnatus

    Actually, I would suggest that punitive estate taxes have a long and storied history in American democracy. Tocqueville noted that the abolition of primogeniture as one of the most effective concrete policies for destroying the possibility of aristocratic social structures, and it was one instituted very early in America. It is a powerful method of preventing the concentration of wealth and the emergence of family dynasties. What is the estate tax but a statist variation on a democratic theme?

    I’m not advocating estate taxes, by the way. As something of an enemy of democracy, I oppose them wholeheartedly. But they’re very American.

    And of course, as KK suggests, there are “ways around” the estate tax.

  • DonS

    One of the reasons for my advocacy that the inheritance tax itself be eliminated is to also eliminate the “ways around” the tax. Other than the relatively modest exemption I propose, if the bequest is to close family members, the transfer would be treated in the same manner as any other transfer of wealth from one person to another. It would be taxable under the regular tax schedule.

  • nativetxn

    Lou, I take exception to your comment about babyboomers. My husband and I are both boomers, my husband a disabled Viet Nam veteran who worked for many years despite his health problems. We have savings, are debt-free, don’t go on luxurious trips, watch our money and give to our church and children generously. Our children are all hard workers raising their own families and trying to teach them good values. Most of the boomers I know have lived the same way. We are not all self-centered, not caring about others people.

  • Klasie Kraalogies

    DonS – I now see how you are using it. But it is still an unusual application of the concept “capital gains”. Normally it refers to the profit (x) made when an asset was acquired for price a, and sold for a + x – such as land, stocks etc. In this case, you are just declaring original asset price to be 0. But this is not a buying acquisition / asset swap, so I’m not sure if capital gains apply. But that is just semantics….

  • Klasie Kraalogies

    Maybe it is more than semantics. The inheritor was given the land, assigned the land based on a will, and not by personal choice (quite possibly). It is not a business transaction. Therefore a value tax could be applied, not Capital Gains. Thus we are back were we started.

  • DonS

    The whole idea, Klasie @ 27, is to get away from the notion of a separate inheritance tax, and move toward the idea that receiving income through inheritance is not so different than receiving income through other means, such as wages or investment. I would rather increase the tax income to the government by taxing transferred wealth, minus a reasonable exclusion, than by taxing productive labor, if we concede as inevitable that we are stuck with big government, or at least the bills of big government, for the foreseeable future. This approach allows Warren Buffett and Bill Gates to “pay their fair share”, as they have been exhorting wage earners to do, but allows family businesses to pass from generation to generation without taxation until they are sold. I don’t really think it is a novel application of the concept of capital gains. The beneficiary is receiving a capital asset at no cost. So, their basis is zero. However, the family can choose to apportion the $5 million exemption to exempt liquid inheritances, and/or to increase the basis of some or all of the transferred capital assets if they want to.

  • DonS

    Klasie, I’m not sure I understand your point @ 28.

  • Lou G.

    DonS: Agree with you about scaling it based on close family members versus distant family or friends. Unfortunately, in this economy, most of those newly retired have not seriously thought through their estate planning scenarios and are going to leave their grands relatively empty handed. It’s actually something that none of use would have ever even expected. Most of the people my age look at wealthy family members who are selfishly spending everything and not planning to leave any of it behind. Maybe this is not across the board, but I know of at least 10 or so families that are in this situation. In fact, I have seen a couple of them divorce, just to protect their assets in case one gets sick or dies. It’s crazy.

    Obviously, SG is a baby boomer or lacks the inability of critical objectivity.

  • DonS

    Lou G. @ 31: The purpose of my proposal is to protect a reasonable portion of the estate (suggested $5 million), to protect family businesses by helping them entirely avoid taxation until they are sold, and also to eliminate estate planning strategies, such as trusts, that now result in the very rich being able to avoid paying inheritance taxes. I don’t like the current efforts by the uber-rich, like Warren Buffett, trying to jack up income taxes on productive earners while they sit comfortably on their billions., with their wealth untaxed.

  • DonS

    Lou, as for sg, I haven’t followed this thread that closely, but I think she’s just saying that baby boomers have, as a generation, been pretty selfish in their outlook, which is manifest now in the fact that they are unwilling to take even small government benefits cuts in order to prevent loading more debt on their children. I’m a baby boomer, and I certainly believe my generation has been a good bit responsible for our current predicament, while recognizing that the entitlement mentality was initially enshrined in law by the two generations ahead of us.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Obviously, SG is a baby boomer or lacks the inability of critical objectivity.

    I am just curious about what it means to lack the inability of critical objectivity. I always wonder why folks are so keen to criticize people personally and not even say why. I am going out on a limb here and figuring it was something I said, but what? Just try to engage the actual statement, please. So, like if I said something that you think doesn’t make sense, you could like quote it and explain what you mean, you know? That way, others and maybe even I (despite my lacking inability) could learn something. Isn’t that reasonable? FWIW, I am not a boomer. Also, a person can entertain an idea and bring it up as a question just for the sake of discussion and see what others think without being committed to it. Can you understand that idea? You know, like look at things from various and even conflicting viewpoints to see where it leads.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    baby boomers have, as a generation, been pretty selfish in their outlook, which is manifest now in the fact that they are unwilling to take even small government benefits cuts in order to prevent loading more debt on their children.

    Don’t you think baby boomers were duped to some extent? I mean they were sold the perpetual motion, I mean perpetual growth economic myth and now that we have discovered that isn’t going to work, they are kind of locked in to the plans they made based on their understanding of the world.

  • DonS

    sg @ 35: Duped? Nah. We have known for decades that the government is running a perpetual deficit, our national debt is grown exponentially, and there is no known way to manage it. We have also known that Social Security, Medicare, and other similar entitlements represent entirely unfunded promises to us that our kids will pay us, through their taxes, the benefits that we allege we deserve.

    To the extent we are duped, it’s because we want to be duped.

  • CRB

    Here is an article that speaks to taxes and related matters. I think it is a masterpiece of insight on our current culture and future viability as a nation.

    http://pjmedia.com/victordavishanson/modern-wisdom-from-ancient-minds/?singlepage=true

  • dust

    CRB…many thanks for the great link!

    You may already know about the interview program videos called “Uncommon Knowledge” from the Hoover Institution? But if not, here’s a link those with Victor Davis Hanson:

    http://www.hoover.org/multimedia/uncommon-knowledge/by-guest/10529

    Enjoy :)

    cheers!

  • helen

    Lou @ [31?]
    Most of the people my age look at wealthy family members who are selfishly spending everything and not planning to leave any of it behind.

    If the “wealthy family members” inherited a good chunk of it themselves and got a head start that way, perhaps they should think of sharing with the next generation.
    If they worked and saved themselves into a comfortable position, exactly what do they “owe” anybody!?
    One or two of my [childless] older relatives professed to be well off and to be intending to share it among the nieces and nephews. It didn’t happen but it didn’t bother me. They were kind in relatively small ways when I was young and very broke; that’s when it really mattered.

    I’ve helped all my children with their first homes [and I've been more generous with the grandchildren than some of them seem to be able to appreciate.] I don’t have anything like most of you would call “wealth”, so frankly, I don’t feel that I owe anyone any more than I inherited, which was a good deal less than they have already gotten. I will be glad if my savings last as long as I do, (which will be a stretch at current interest rates).

  • CRB

    Dust,
    Thanks for the link. I’ve seen a couple of them, very informative.

  • Lou G.

    DonS: “I think she’s just saying that baby boomers have, as a generation, been pretty selfish in their outlook, which is manifest now in the fact that they are unwilling to take even small government benefits cuts in order to prevent loading more debt on their children. ”
    Actually, that’s a pretty close restatement of my position (#12), not SGs (#15).

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Actually, that’s a pretty close restatement of my position (#12), not SGs (#15).

    I didn’t make any statements at 15, only questions.

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