12-Dec-17
Repealing the Estate Tax – Commentary on its Context
Take-Away: There is more emotion and rhetoric associated with the federal estate tax than any other tax imposed by Congress. Placing that tax into context, and eliminating the emotion, adds a much needed perspective to the tax and just how many folks have to contend with it.
Pending Proposals: The House Bill would double all transfer tax exemptions, so an individual could leave $11.2 million estate tax free (and a married couple, due to portability) could leave $22.4 million estate tax free. The House Bill would fully repeal the estate tax in 2024. The Senate Bill, like the House Bill, would double the exemption amounts, but it’s Bill is silent with regard to the repeal of the federal estate tax or the GST tax. The Senate Bill is also silent with regard to whether there will continue to be a basis ‘step-up’ to assets on the decedent’s death.)
Background: The Center on Budget and Policy Priorities (May 5, 2017) reports that only 0.2% [that’s not 2%] of all estates are expected to pay federal estate taxes in 2017. That tax is expected to generate this year $19.7 billion in revenues, which sounds like a very big number until you look at the entire expected tax revenue for the country this year from all sources. If the current proposed doubling of the federal estate and gift tax exemption becomes the law, the number of estates paying the estate and GST tax will drop from about 5,000 to a number somewhere below 2,000 a year. In 2018 only 0.1% of estates are projected to pay any federal estate tax despite the proposed higher transfer tax exemptions.
Emotions Are Being Manipulated: As the 20th Century satirist Will Rogers once said, capitalizing on Ben Franklin’s famous ‘the only sure things in life are death and taxes:’ “The difference between death and taxes is death doesn’t get worse every time Congress meets.” Taxes, but especially estate taxes, carry with them a highly emotional reaction by the electorate. We are often told by folks in Congress that the federal estate tax imposes a tax the same dollar twice. We are told by those in Congress that the federal estate tax forces farms and closely held businesses, the backbone of the American economy, to be sold at fire sale prices, just to pay the evil federal estate tax [conveniently ignoring IRC 6166 which permits the payment of estate taxes on farms and small businesses over a period of 14 years.]
But those common complaints about the federal estate tax coming from our elected officials Washington assures them their largest campaign contributions, year after year. Studies have shown that it is a candidate’s promise to vote for the repeal of the federal estate that that garners their largest campaign contributions. If there was no federal estate tax to get folks riled up about, those generous campaign contributions might dry up. While there are other ‘hot topics’ that prompt the electorate to make campaign contributions, e.g. women’s health, the environment; global warming, etc., by far the most emotional topic that produces the most in Congressional campaign contributions is the promise by a candidate to do everything in his or her power, once they are elected and returned to Washington, to repeal the federal estate tax.
It’s no surprise then when a candidate’s lexicon not-so-subtly shifts from ‘repealing the federal estate tax’ to ‘killing the death tax’ in order to pour even more fuel on the electorate’s emotional fires. No one likes to pay a tax, but if 2,000 to 5,000 estates have to pay an estate tax, with $11 million being exempt from that tax, it is only a handful of Americans who will feel burdened by the tax- or more accurately, it will be the decedent’s heirs who will feel the burden of the estate tax which will cut their inheritance by 40%.
I might add that lawyers, accountants and life insurance salespersons equally contribute to the emotions that surround the federal estate tax- it’s a ‘cottage industry’ that plays upon people’s emotions to avoid paying any federal estate tax.
It’s a Voluntary Tax: The payment of the federal estate tax is not inevitable either. Professor A. James Casner of Harvard Law School once testified before Congress:
“In fact, we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.” (Testimony before the House Ways and Means Committee March 15-23, 1976)
What Professor Casner was saying was that with proper planning a federal estate tax can be completely avoided.
The obvious example is to make a charitable bequest of the decedent’s estate above the decedent’s federal estate tax exemption amount. Family and charities selected by the decedent receive all the decedent’s wealth, while the federal government receives nothing.
Or consider the estate plan that Jackie Kennedy Onassis established on her death. On her death in 1994 Ms. Onassis devised most of her estate to her children. However, her estate plan anticipated that her children would timely disclaim some or all of their inheritance from their mother to a testamentary charitable lead annuity trust (CLAT) that she established that would last for 24 years. The CLAT’s annual payments would be to a private foundation (charity) that Jackie had established. At the end of the 24 years the CLATs’ remaining assets would then pass to her grandchildren. The transfer of assets to the CLAT would be sheltered by the federal estate tax charitable deduction, meaning that no federal estate taxes would be paid on Ms. Onassis’ death, and 24 years later her grandchildren would receive millions of dollars from the then-terminated CLAT. This plan did not work as anticipated because Ms. Onassis’ children decided to not disclaim any portion of the inheritance they received from their mother, so no assets were transferred to the CLAT and Ms. Onassis’ estate was not able to claim a federal estate tax charitable deduction. While the Onassis estate plan did not save taxes, if the children had followed their mother’s intent, no federal estate tax would have been paid on their mother’s death. The point is that if Jackie Kennedy Onassis could have avoided paying any federal estate tax on her death through proper planning, so can any other taxpayer faced with a federal estate tax liability. If wealthy individuals choose not to plan, by default they choose to pay a federal estate tax.