There are two things that are sure in life – death and taxes. And when you die, those two things could intersect. If your estate is worth $1 million dollars or more – your estate could be taxed up to 55% starting in 2011. Many people like to call it the “death tax”.
This year was the first year that the estate tax has lapsed since it was enacted in 1916. America’s first billionaire – John D. Rockefeller – was taxed at a 70% rate when he died in 1937.
Estate Tax Expired In 2010
At the end of 2009 Congress found itself paralyzed and unable to act. The result is that the estate tax ended up expiring. For the current tax year, 2010, the estate tax is no longer in effect. It will go back into effect next year.
For the families of several wealthy people who died this year, the estate tax lapsing means that they will end up saving millions (or billions) of dollars in taxes that would have been levied had their loved ones died in 2009 or 2011. One of the most recent examples was George Steinbrenner.
Steinbrenner passed away just over a week ago, leaving an estate estimated to be worth over $1.15 billion dollars. If he had died next year his estate would have been taxed at the 55% rate, meaning the family would have lost over 500 million dollars to estate taxes. Since he died this year, however, when the estate tax was no longer in effect, his family will save over half his fortune.
In life, George Steinbrenner beat the Red Sox. In death, he beat the IRS.
Steinbrenner’s death on July 13 occurred six months after the federal estate tax expired. Forbes magazine estimates the Yankees owner’s net worth was $1.15 billion, so the timing of Steinbrenner’s death could save his heirs up to $500 million in federal estate taxes.
But future heirs may not be so lucky. The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say.
Another billionaire’s family saved even more money because their loved one died in 2010. They saved several billion that would have otherwise gone to the government.
Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.
Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.
Arguments For And Against The Estate Tax
The estate tax has been extremely controversial since it was enacted, and it has been a political football for years.
Those in favor of the estate tax say that it is important to have the tax as it helps to give opportunity to others who aren’t wealthy.
“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffett and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”
On the other hand, those against the estate tax say that it is an unfair tax because it essentially taxes the same income twice. Once when you earn it, and once when you die. If the estate tax isn’t updated it could be increased from 45% to 55%, and the threshold lowered to $1 million dollars. That means it could affect far more people than just the wealthy.
But future heirs may not be so lucky. The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say.
A $1 million exemption would affect a lot of families that are well out of Steinbrenner’s league. “You take a home, an IRA or 401(k) retirement account, some other savings and you get to $1 million pretty easily,” says Richard Behrendt, senior estate planner for Robert W. Baird and a former IRS attorney.
Families who live in areas with high property values are particularly vulnerable, says Clint Stretch, tax principal for Deloitte Tax who lives outside Washington, D.C. “People in my neighborhood bought a house for $32,000 in the ’60s, and now it’s worth $1 million,” he says. “If they’ve got anything else, they would be paying an estate tax.”
So a lot of families who have family homes that have appreciated over the years, and a few extra assets could end up losing over half of what they’ve earned over the years. To me that just doesn’t seem fair. At the very least I think the estate tax needs to be updated so that it truly doesn’t affect families with small businesses or families with homes that have appreciated. If I were really pressed I think I would ask for the estate tax to be repealed altogether. It just doesn’t seem right to take money from people who have earned it through nothing but their own hard work and ingenuity.
What do you think about the estate tax? Do you think it’s a good thing that helps to spread economic opportunity, or is it unfair double taxation that isn’t just? Tell us your thoughts in the comments.
I think it should be repealed. I don’t like the government taxing us in general and it’s bad enough they take the amount of taxes from us that they do every year. They don’t need to take from us when we die too.
I think if you’ve already been taxed on the money, you (or your family) shouldn’t be taxed again. Hopefully people will make good decisions with what happens to their money, investing in family and friends as well as charities.
I think that an estate tax is essential to balancing economic inequities. At the same time however this tax needs to be balanced in order to allow for wealth to be transferred to heirs. Economic stability is one of the primary reasons all of us get up and go to work each day, and passing this stability on to our families is a noble goal.
So I think the tax should exist , perhaps at a lower rate and after a higher limit maybe something in the 5-10 million range being exempt. This tax really isn’t supposed to hurt wealthy families, but rather to limit the ability of ultra rich tycoon type families from controlling the country through power. The beauty of this Country is that it produces people such as Rockefeller, Vanderbilt , Buffet, Gates, Trump, and yet if your are not born into one of these families you have just a great a chance as anybody to become the next name on that list. This tax helps to ensure that possibility for future generations.
A couple points to make – as I mentioned to Peter, this year, “no estate tax” doesn’t mean the beneficiaries get off scott free. They take on the cost basis of the deceased. e.g. I leave you $10M in stock, but it cost me $1M. You now have a $1M basis, and when you sell, there’s tax due. (There is a small step up, but it’s nothing compared to the billions we are talking.)
The cap gain rate is 15% this year, right? Not so fast. Cap gains cause ATM to kick in. All I know is that when I claimed $10K in gains last year, my bill went up $2250. I’m not complaining or bragging, just stating an overlooked fact. So what the current law does is to tax the gain that wasn’t taxed already. Let me spell that out. I paid tax when I earned the money. I pay tax when I have a gain. [With the 2010 rules] my heirs pay tax on the gains, if any that I wasn’t taxed on. This doesn’t seem too unfair, does it? This protects the “family farm” issue, as no tax is due unless sold.
AM – do you really feel this tax in any way “balanc[es] economic inequities”? If I work and succeed, why is it anyone’s inclination to “level the field”? Bill Gates may be rich, but look at how many people he employed on his path to success. The point is moot since he and Buffet are giving away all their money, but if he wanted to give it to his kids, why would I stop him? Put in a high enough estate tax and you’ll watch the money get earned elsewhere. The 2010 rules actually provide the best balance, once understood. BTW, the estate tax is a tiny portion of revenue. You’ll raise far more by enforcing tax collection elsewhere. Illegal businesses, unclaimed income, etc.
There is no “angel of death” this year. With this provision all assets over, I believe, 1.5 million dollars has the same basis as the person that died and it no longer is the date of death. This could result in a much higher tax.
So, if a broke person in America works hard for years and years, becomes wealthy, they should should pay 70% or more in taxes? This is a bad idea I think… good for the government… but not for the people… or for small business.. our tax system is old, outdated, and unfair. Needs a major overhaul…
Also, Congress has been paralyzed now for a long time.
Think about it. Where does the 70% come from? How can something that is taxed at 45% or 55% and have a huge exemption pay 70% in taxes. THINK!!!
There are so many ways to avoid this tax. There are so many ways to share or give to your children and or others before you die to avoid this tax. It is a shame that a few people try to control others minds.
There is no way that someone with even a 10 million dollar estate would pay 7 million to the gov. LOOK AT THE TAX BOOKS. THEY ARE FREE AT http://www.irs.gov WHY NOT EDUCATE YOURSELF?
Allie – the 2009 rules exempted $3.5M, and applied a rate of 35% to taxable amounts about that. So a $10M estate with no spousal unlimited amount or other issues, would have paid $2.275M. Your point is noted.
But your tone prompts a question – it makes little sense to have a tax that’s so easily avoided (your assertion) that it’s not collected.
What is your proposal? I can’t tell if you prefer the 2009 rules or 2010.
My reasoning is that you can only spend so much. Why do we need so much? Give to others so that they may enjoy it. Help others. The joy is in accomplishing much to accumulate and giving much. Not in hording. George Steinbrenner’s family will pay much in taxes. No angel of death this year. THINK!!! It doesn’t matter what I think of 2009 or 2010 taxes. I don’t like the idea that all wealth will accumulate in just a few of our countries families. Guess you don’t remember history. Even the Rockefeller’s paid the most in estate taxes and it hurt them how? Our family paid more in taxes than we spent this year. It did not hurt us. What does it matter. We have a warm house, food, a car, health insurance. What more did we need. We helped our children and others (which they did not ask for). They never have. We gave to our charities etc.
Allie – history is past. I’m curious what you think the rates should be now.
2009 was basically as I stated $3.5M exemption, then 35%.
2010 stepped up $1.3M and let the assets pass with no step up on the rest. But then taxed on the sale.
You feel that a tax on the rich (after their death) is appropriate. I understand that. I’m just trying to understand the numbers.
I will say, I think there’s more damage to the system and to morale in a system that keeps changing, a moving target that no one understands than in a defined set of rules that you’d propose.
You want to exempt $1M and tax the rest 50%? I will act accordingly, buying insurance to cover the tax due if I wish to leave my heirs more than this would net. You want the 2010 law? I better be careful my will/trust does leave my spouse the ‘exemption amount’ expecting it to be $2M or whatever, but then finding it’s now zero.
I am definitely against the estate tax. I live in a rural area and come from an agriculture background. Where I live, land prices have risen at rates way above inflation for over a decade. With the price of agricultural land, and equipment to farm the land (a new tractor costs $250,000!), it doesn’t take a very large farm to have over one million dollars in assets. With most family farms, a child of the owner has been operating the farm for years or decades when the owner dies. Upon their death, estate taxes are detrimental to the farm. Many times, the children have to sell the farm to pay the taxes….which causes them to lose their own livelihood, income, and farm that they have lived on their entire lives. Even without the agricultural aspect, I believe that it is unethical to not allow a person to pass their assets onto whomever they choose.
Family farms and small business owners are one of the hardest hit by the estate tax. Like a farm – in a small business if you own a building, some equipment, etc you can quickly reach the level of the estate tax – and heirs end up having to sell the family home or business just to pay the taxes.
If you have a building you have depreciated that building, you have made improvements and deducted the improvements and or depreciated them also. Your heat, electric, workers, equipment is subsidized by taxpayers. If you are a farmer you are subsidized. Did you ever look up the farmers in your neighborhood to see how much the gov pays them to farm and not to farm. I have a neighbor across the street from us that I have seen put in a crop once since 1973. Yet when you look up the farm subsidies he has averaged $1000 a month. http://www.ewg.org.
Wow, his family really cleaned up on his initial investment! $10 million parlayed into a world-renowned franchise plus a cable network. I guess his kids won’t have to worry about going hungry anytime soon.
I think all taxes our taking on a new form of laws shaping into a future world government and christian leaders our advising GOD’s Kids to get ready for the change to the enconomy..and do what the bible says 10 percent tides and he will give you wise knowledge and understanding on how to invest..the market will balance out to the one who controls it?