Tags: estate | tax | election | foundation

Is Estate Tax Repeal Fight a Shakedown?

Monday, 04 August 2014 07:57 AM Current | Bio | Archive

Many people think that the latest Republican attempt to repeal the estate tax is merely a political ploy. After all, there is an upcoming election to be won.

If there is one thing politicians of all persuasions know it is that they need money to win elections. Playing well-heeled competing interests off each other is a sure-fire way to generate lots of campaign contributions.

Let's all understand this. Congress created the estate tax game and set the rules. Keeping the game alive by pitting one side against the other and changing the rules as needed to keep things at a fervor pitch is crass, but it keeps the money rolling in.

On one side of the field are the taxpayers who realize that a lifetime of hard work can be expropriated by the government and there is little they can do about it. Essentially, during life you are married to the government and like a dutiful spouse pay more than half your earnings. At death, the government treats it like a divorce and you pay more than half of what's left as a property settlement.

On the other side is the entire estate tax planning industry, which find their work highly financially rewarding even if not exactly personally fulfilling. It's a vast array of professional service providers who depend on the complexity and indecipherability of the tax law to maintain their necessity.

It is a lot of brainpower and talent that could be more useful doing something far more constructive for society. Something like focusing on the real human and financial problems that occur to families and businesses when someone dies, without being distorted by tax considerations, would be useful and desirable.

Is the estate tax of any real benefit to the government? Not really. It raised just $13.7 billion last year. It is such a tiny fraction of the federal tax revenues it is virtually statistically insignificant.

The Congressional Joint Committee on Tax has issued numerous reports during the years that state the estate tax is actually a net revenue loser for the government. Because all estates, taxable or not, step the basis of the estate assets up to fair market value, the loss in income tax is far greater than is the estate tax received.

Supporters of the estate tax claim it is necessary because it keeps wealth from accumulating in too few hands. This is the class warfare school of logic.

However, the opposite happens because there is an estate tax.

Larger taxable estates use tax-exempt foundations, controlled in perpetuity by a select few, to not only hold wealth but also avoid both the estate tax and the income tax to keep on accumulating more wealth.

A typical estate planning technique is for a business or appreciated investments to be gifted to a charitable remainder trust. That generates an income tax deduction. The income tax savings are then used to fund a wealth replacement trust that buys life insurance. In the meantime, assets gifted to the trust can be sold without incurring a capital gains tax.

At death, the insurance pays off an amount that is typically a multiple of the amount that eventually goes to the charity. The charity getting the remainder of the trust is many times the family's own private tax-exempt foundation run by the heirs.

Will all these intricate and complicated estate tax planning schemes continue to be necessary? That answer to that question will only be revealed after the coming election.

In the meantime, those running for Congress will expect the estate tax adversaries to keep the campaign contributions coming.

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Many people think that the latest Republican attempt to repeal the estate tax is merely a political ploy. After all, there is an upcoming election to be won.
estate, tax, election, foundation
Monday, 04 August 2014 07:57 AM
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