Future of the Federal Estate Tax

Richard H. Thaler (NY Times) argues for 45% estate tax rate, $3.5M exemption (indexed for inflation)

On November 6, 2010, the New York Times published Estate Tax Issue Offers Quick Test for Congress, by Richard H. Thaler.  The article appears in the Business section under “Economic View.”  The article is Thaler’s view on the estate tax.  Thaler is comfortable taxing the wealthy and giving tax breaks to the middle class:

Right now, no one has any idea what rules will be in place in January — or even how to interpret some particulars of the current rules, as we shall see. (And if Congress does nothing, rich relatives might want to watch their backs on New Year’s Eve.) . . .

If Congress had simply indexed the 2009 limit to adjust automatically for inflation, and left the tax rate at 45 percent, we would have a reasonable law in place and would have avoided a decade of uncertainty. . . .

What should Congress do? The most important step would be to end the uncertainty by legislating a permanent set of rules. If Congress doesn’t act, even middle-class households might soon be facing an estate tax. And of all the taxes in our system, the estate tax probably requires the most advance thought. (It is called “estate tax planning,” after all.) To avoid future showdowns in Congress, the exemption should be indexed for inflation if the estate tax remains. . . .

We could lower the rate if we also lowered the exemption, but that would be a mistake. Dealing with the estate tax is a major nuisance, so it should apply to as few people as possible. . .

So let’s be serious. There are lots of ways to spend $250 billion. Trim the deficit, improve education, support the troops, or make sure heiresses like Paris Hilton have the proper attire for trips to St.-Tropez. At this time in our history, which of them seem prudent?

Deborah L. Jacobs explains why 2010 is a good year to leave the children the house

On October 20, 2010, the New York Times published, Leave the Children the House, Without a Hefty Tax Bill, by Deborah L. Jacobs.

Jacobs explains that 2010 is a good year to give the house to children because the gift tax rate is at 35% in 2010 and it is scheduled to be at 55% in 2011.

Jacobs provides the following strategies:

• Give partial interests.
• Use a grantor trust.
• Create a QPRT.
• Create a legal entity.

Jacobs explains that there are drawbacks:

Perhaps the biggest hurdle, though, is the awkwardness of having business relationships with family members . . .    

If you want to keep living in the house, you must pay fair-market rent to the family members or an entity (like a trust) that becomes the owner. Awkward though this might be, it's a smart estate tax move, because the rent then is a way of giving money to your family without having to pay gift tax. 

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and by tweeting at http://twitter.com/djworking.

Deborah L. Jacobs (NYT): "Devising Strategies While the Estate Tax Is in Limbo"

On September 15, 2010, the New York Times published Devising Strategies While the Estate Tax Is in Limbo, by Deborah L. Jacobs:

The federal estate tax is scheduled to rise from the ashes on Jan. 1, and a lot more families may feel its bite unless Congress changes current law.

The resulting uncertainty about what Congress might do, and if and when Congress might do it, is complicating financial planning and is a particular burden to the retired, who must find a balance between what they need to live on and how much they might give away to avoid estate taxes. Fortunately, a number of strategies are available, and not all of them involve depleting your resources.

Jacobs discusses making annual exclusion gifts and using the lifetime exemption, and then specifically highlights the following strategies, which “can help preserve assets for heirs without breaking your bank”:

• buy life insurance
• remarry
• finance college savings
• create a trust

Bridget E. Murray, What to do while we wait for congress to act, Law Office of Bridget E. Murray, Sept. 17, 2010.  Murray finds paying an estate tax more inviting that remarrying: 

Personally, while I’d love my estate to pass to my heirs tax free, the thought of having them pay taxes would not, in and of itself, send me back to the alter.  However, for all you wedding planners out there, feel free to use this as one more possible selling point for the married life!

Joseph Timothy Hahn, Estate Tax Strategies While Estate Taxes Are In Limbo, Hahn's Estate Planning Attorney Blog, Sept. 19, 2010: “All very good advice.” 

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Jacobs issues updates that can be downloaded from the book's Web site www.estateplanningsmarts.com, and tweets at http://twitter.com/djworking.

Another billionaire dies in year with no federal estate tax: John Kluge passed away at 96

Clare O'Connor, Billionaire John Kluge Dies At 96, Filthy Rich (a Forbes Blog), Sept. 9, 1010:

John Kluge, the oldest member of the Forbes 400, has died at 96. Kluge was to be on the upcoming 2010 list of America’s wealthiest people with a net worth of $7 billion, up from his $6.5 billion fortune on last year’s Forbes 400 list. His fortune increased by $500 million in the last year of his life thanks to low-risk investments and a cash pile swelled by a slight upturn in the markets. . . .

With Kluge’s passing, the Forbes 400 has a new oldest member: 95-year-old David Rockefeller Sr, grandson of oil baron John D. Rockefeller.

See:

• CBS News - “The University of Virginia said Wednesday that Kluge (pronounced KLOOG-ee) died Tuesday [Sept. 7] at his home near Charlottesville, Va.”
• NY Daily News
• NY Times
• USA Today

I updated Dying Free of the Federal Estate Tax: Billionaire Deaths in 2010 to reflect that five billionaires have now died free of the federal estate tax in 2010.  Meanwhile, Congress continues to dither.

David Herszenhorn (Boston Globe): aids to House Republican leader, Rep. John A. Boehner, say he would like to continue moratorium on federal estate tax

On September 13, 2010, the Boston Globe published Middle class tax cuts gain support, by David Herszenhorn.  (This story was written for the New York Times and picked up in the Boston Globe, see update below.) 

The House Republican leader said yesterday that he was prepared to vote in favor of legislation that would let the Bush-era tax cuts expire for the wealthiest Americans if Democrats insisted on continuing the cuts only for families earning less than $250,000 a year.

Speaking on CBS’s “Face the Nation,’’ Representative John A. Boehner of Ohio made clear that he supports continuing the lower tax rates at all income levels and said Democrats would be making a mistake by increasing taxes on anyone, given the weak economy.

But Boehner said that absent any other option, he would vote in favor of legislation proposed by President Obama, House Speaker Nancy Pelosi, and other Democratic leaders who want to continue the lower rates only for Americans they regard as middle class. . . .

In recent days, Boehner has called for extending all the Bush tax cuts for two years and freezing government spending at 2008 levels. In addition to the lower marginal income tax rates, aides said Boehner would like to continue the moratorium on the federal estate tax, which is also due to expire Dec. 31.

The one-year elimination of the estate tax has allowed some extremely wealthy Americans to leave enormous inheritances without paying any federal tax. Republicans have long criticized the estate levy as double taxation because the assets were generally taxed as income when they were first earned.

YouTube video -- Boehner on Face the Nation: Freezing All Tax Rates Essential To Helping Economy, Creating Jobs:

Related articles:

• David S. Morgan, Boehner: I'll Drop Tax Cut for Rich If I Have To, CBS, Sept. 12, 2010. 
• John Whitesides, UPDATE 3-Top US House Republican hints at tax compromise, Reuters, Sept. 12, 2010.

More on Rep. Boehner:

• Website
• YouTube Channel
• Gov. Track:

Update: Special thanks to reader, scarpy, who pointed outan error in my post: "Just a quick correction to your headline -- Herszenhorn wrote the piece for the NYTimes and the Globe picked it up." 

The article appeared in the NY Times as House G.O.P. Leader Signals He’s Open to Obama Tax Cut.  The article did not have the comment by the aides to Rep. Boehner: "In recent days, Mr. Boehner has called for extending all of the Bush tax cutsfor two years, which would cost more than $500 billion, and for freezing nonsecurity discretionary spending at 2008 levels, which some analysts say would require cuts of more than $100 billion."

The Boston Globe picked up Herszenhorn's article: Middle class tax cuts gain support.  Here, the article contains the information that is pertinent to the federal estate tax: "In recent days, Boehner has called for extending all the Bush tax cuts for two years and freezing government spending at 2008 levels. In addition to the lower marginal income tax rates, aides said Boehner would like to continue the moratorium on the federal estate tax, which is also due to expire Dec. 31."

(I did a quick redline of the two versions (PDF) and there are other differences between the articles.)

Recent articles explain that, for the right families, 2010 is an ideal year to transfer wealth to younger generations

[1] No pressing news regarding the federal estate tax.

Although the federal estate tax is being mentioned in many articles, there is no pressing news.  In Nothing to Report (Estate Tax News Blog by Kevin Staker, 8/24/10), Kevin Staker laments about “nothing worthy to report”:

This author searches the Internet several times a day for any news re the estate tax worthy to report. I find it interesting there has been nothing worth reporting since August 4th. Congress being out of session most likely is the cause. 

[2] Focus has shifted to taking advantage of the gift tax.

Journalists are using this break from the estate tax to educate readers about the gift tax opportunity that exists in 2010.  Here are recent articles on the 2010 gift tax opportunity:

[2.1] Joseph A. Giannone, For the rich, 'tis better to give than wait, Reuters, Aug. 18, 2010.

Giannone provides several reasons why 2010 is a good year to gift assets to younger generations: (1) “U.S. taxes [are] almost guaranteed to rise next year,” (2) “[a] weak economy has led to razor-thin interest rates and beaten-down valuations.” 

With regards to taxes rising next year, Giannone elaborates that (1) “capital gains taxes are going t rise,” (2) “top earners may pay nearly 40 percent of their income,” (3) generation-skipping transfer tax rates “are likely to return next year at rates as high as 55 percent,” (4) gift taxes “are set to bounce back to 55 percent next year.” 

Giannone writes, “Contrary to the usual advice, investors should record income and capital gains now, but defer charitable deductions until next year.” 

Giannone suggests various strategies for shifting wealth: (1) intra-family loans, (2) GRATs, (3) charitable lead trusts, and (4) “assets sold into a trust.”

[2.2] Deborah L. Jacobs, Five Ways To Freeze Out Uncle Sam, Forbes.com, Aug. 25, 2010.

Jacobs’s article picks up where Giannone’s article concludes.  Giannone suggests four strategies to transfer wealth to younger generations.  Jacobs elaborates on these strategies in some detail.  She also discusses an additional strategy that is appropriate in our low interest rate, depreciated asset environment: revising existing GRATs.

Jacobs’s article is rich with details, which are presented in plain English.  For example, Jacobs teaches about the AFR and the Sec. 7520 rate, and when each is used. 

(In a previous blog entry, I suggested how Jacobs’s article can empower readers.) 

[2.3] Paul Sullivan, A Year to Give Gifts to Your Heirs, and Save on Taxes, NY Times, Aug. 27, 2010. 

Sullivan provides three reasons that make 2010 “a year to give gifts to your heirs”: (1) low tax rates, (2) “the values of many assets are still depressed,” and (3) no generation-skipping transfer tax in 2010. 

Sullivan outlines some of the risks involved with giving gifts: (1) “certain techniques guaranteed an audit” by the IRS, and (2) psychological effects on those who receive large sums of money without incentives. 

Sullivan concludes with the following advice: “Beating the federal government at the tax game is great, but damaging the lives of your heirs in the process could make it a Pyrrhic victory.”

[2.4] Bucks Editors, Will You Give More Gifts to Your Heirs This Year?, Bucks, Aug. 27, 2010.

This entry summarizes Sullivan’s article.  There are four comments to the entry.  One comment is by Deborah L. Jacobs.  Jacobs’s comment is informative and should be read in conjunction with Sullivan’s article:

Without elaborating, Paul Sullivan notes that making gifts this year to trusts that will benefit grandchildren raises the risk that all the assets will be taxed when they are withdrawn. It's important to note that the same risk applies to gifts to custodial accounts (used for grandchildren who are minors) as well as deposits to 529 savings accounts for their benefit. The problem, in all these cases, is that since there is no generation-skipping transfer tax, and no exemption either right now, it is impossible to apply GST exemption to any of these entities. So the prudent course of action is to only make cash gifts this year to grandchildren who have already reached the age of majority.

[3] What can you do?

[3.1] I recommend printing out the articles above on gifting opportunities and risks in 2010.  These articles are very good.  There is added value in reading them together. 

[3.2] To continue your studies, you can purchase (and maybe give away as a gift) Deborah Jacobs’s book on estate planning, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Some professors have seen the benefit of an easy-to-understand explanation of estate planning and are assigning the book to their students.  See An uncasebook about estate planning?

In NY Times op-ed, Ray D. Madoff lambasts dynasty trusts: “America Builds an Aristocracy”

On July 9, 2010, the New York Times published America Builds an Aristocracy (free registration now required), by Ray D. Madoff.  Madoff begins by describing dynasty trusts as an estate planning technique:

These estate-planning instruments enable affluent people to provide their heirs with money and property largely free from taxes and immune to the claims of creditors. And rather than benefit only children and grandchildren, dynasty trusts provide for generations in perpetuity — truly creating an American aristocracy. . . .

This type of trust is new because until very recently most states had a “rule against perpetuities,” which limited the term of any family trust to about 90 years, after which time the family members would own the property outright. This rule derived from the idea that property is best controlled by the living.

In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.

Madoff closes her op-ed article with a proposal on how the federal government can limit dynasty trusts:

What can be done to eliminate these trusts? A state-level solution is unlikely, since all 50 states would need to act in unison. But Congress could fix the problem by limiting the generation-skipping-transfer exemption to trusts that last no longer than two generations. After that, beneficiaries of a trust should be subject to tax, like everyone else. Then America would not have to face the uncontrollable growth of a new aristocracy.

Commenting on Madoff’s op-ed, Martin Shenkman (estate planning attorney, New Jersey) had the following advice in Taxpayers Keep Fiddling While Tax Bennies are Burning (LawEasy.com, 7/12/10):

Dynasty Trusts: Really rich folk like to transfer assets to perpetual trusts in Delaware, Nevada, South Dakota or Alaska, among other states. These trusts can grow forever outside the estate, gift and GST tax regimes. They may also facilitate minimizing state income tax. Assets can remain out of the reach of creditors. A university profess[or] wrote an article in the July 12, 2010 New York Times lambasting these trusts as contributing unreasonably to the concentration of wealth in our country. Well, if you have big buckaroos and have done a dynasty trust (or two….) move now.

(Special thanks to Michael Hepner, a benefits professional, for alerting me to the comment by Shenkman.)

Paul Krugman (and Senator Reid) on reducing the estate tax: “This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.”

On June 20, 2010, the New York Times published an op-ed by Paul Krugman, Now and Later. Krugman writes about the difficult state of the economy and the need to eventually raise taxes, but Krugman urges Congress to gets its timing correct.

Krugman would not reduce the federal estate tax. He asserts that such a tax cut would not help the economy:

So America has a long-run budget problem. . . .

But if we need to raise taxes and cut spending eventually, shouldn't we start now? No, we shouldn't. . . .

The responsible thing, then, is to spend now, while planning to save later.

As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can't afford it. In so doing, they are undermining spending at a time when we really need it, and endangering the recovery. Yet efforts to control health costs were met with cries of "death panels."

And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.

But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.

On June 21, 2010, Senator Harry Reid [D-NV] quoted Krugman's article on the floor of the Senate. Here are Sen. Reid's comments (quoted from the Congressional Record:

Mr. REID. Mr. President, my friend says he has never seen anything like this. Well, I have never seen anything like this reasoning. Everyone knows that President Obama did not cause the oil gushing into the ocean, and he has done his utmost to try to alleviate the pain and suffering of the people in the gulf. He had the good fortune of getting the company responsible for this oil gushing out of the ocean to come up with a $20 billion trust fund to pay the people who suffered. There were some Republicans last week who said they thought it was wrong for the President to do that. But that was a very small minority who believed that. I have never seen anything like this. So President Obama is not responsible for the oil gushing out of the Earth into the ocean, and President Obama is not responsible for the severe recession that hit this country in the last few months of the Bush administration.

   I cannot imagine anyone thinking we should not have taken the measures we did to help bolster the economy. The economic recovery package created millions of jobs. There is still money in the pipeline to create more jobs. And as it says in this one op-ed piece in the New York Times today:

   And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it will reduce revenue by billions of dollars a year, permanently.

   It will be interesting to see in the next few weeks how these same budget hawks feel about the estate taxes that we have to address. I would hope we can all be calm and deliberate here. We have a few weeks left. We have 2 weeks in this week period, 4 or 5 the next work period to get some things done here.

   We have appropriations bills we have to do. We have these tax extenders we have been working on, as I indicated, for 8 weeks. We have the unemployment benefits we need to extend. People are now desperate for that money. We have also something to help States called FMAP, which helps for Medicaid, which has been such a drain on the States because of the tremendous problems we have had with people being out of work and needing to go on Medicaid because there is no place else for them to go for health care.

   I would hope we can move forward on the legislation that we tried try to finish last week. I am grateful we were able to finally get the short-term fix on the patients who are Medicare recipients. Now if we can get something done in the House there, doctors will be able to be reimbursed not at the fat and sassy rate, but at least it will be better than the 21-percent cut that was going to go into effect today or tomorrow.

Sen. Reid's comments inform that (1) the Senate might take up estate tax reform in the coming weeks, if it has time; and (2) Sen. Reid will probably oppose any estate tax measure that would increase the deficit.

NY Times article, by David Kocieniewski, reports on the divide over estate tax reform

On June 11, 2010, the New York Times published What an Estate Looks Like to the Taxman, by David Kocieniewski. 

Kocieniewski reports on the divide over estate tax reform, and provides a balanced summary of the positions for and against the estate tax.

Kocieniewski asks interesting questions:

The estate tax is one of those hyper-combustible issues where emotion, and shrewd lobbying, can loose an outsize uproar. . . .

What is the dividing line between wealthy and upper middle class? Or between someone who owns an estate and someone lucky enough to have bought a home decades ago and watched its value grow to seven figures? . . .

Mr. Buffett warned Congress in 2007 that without an estate tax, the United States runs the risk of becoming a “dynastic plutocracy.”

But where does that dynastic plutocracy begin? There is an astronomical gap between Mr. Buffett’s fortune, which Forbes estimated at $47 billion, and two retirees in Marin County, California, whose life’s work might have allowed them to leave their heirs $3.5 million in assets, mostly in the value of a house.

NY Times: estate tax uncertainty is keeping advisors busy

On June 11, 2010, the New York Times published Confusion Over the Dormant Estate Tax Keeps Advisers Busy, by Paul Sullivan. 

The article states that confusion over the estate tax is keeping advisors busy.  It also provides some reasons why advisors are busy:

• planning for the scheduled return of the estate tax with an exclusion of $1M and a tax rate of 55%
• creating GRATs before congress restricts them -– see my category GRATs for more information about Congress’s efforts
• taking advantage of the 35% gift tax rate in 2010 -- “the lowest gift tax rate since 1933”

Sullivan explains that the law is unfair.  While 2010 could be a “bonanza” for the wealthy, 2011 could “snare” the merely wealthy:

If Congress does not reinstate the estate tax this year, 2010 could be a bonanza for the nation’s richest. . . .

The real problem comes for the merely rich — individuals worth more than $1 million and less than $3.5 million and couples with net worths of $2 million to $7 million who previously did not have to worry about the estate tax. If Congress fails to act again this year, the estate tax laws next year will revert to their levels before 2001, and that could snare a host of people who set up the estate plans on the assumption that there would be no tax when they died.

(Special thanks to Michael Hepner, a benefits professional, for bringing this article to my attention.)