The Federal Estate Tax – Grossly Oversimplified

One thing that really sets my blood to boiling is when I hear politicians  talking about “the death tax” and how we need to permanently repeal the federal “death tax”.  I get so angry because THERE IS NO FEDERAL DEATH TAX AND THERE NEVER HAS BEEN ONE IN THE HISTORY OF THE UNITED STATES.

Many believe that the term “death tax” was invented by political marketers to fool people into supporting the repeal of the federal ESTATE TAX under the George W. Bush government.

A little history:  The federal estate tax was enacted by Congress in 1916.  It is a tax on the transfer of property that a decedent owned or controlled at death.  The tax may apply to property transferred by a will or the laws of intestacy – it may also apply to certain life insurance policies proceeds, pensions, trusts and even to jointly-held assets that pass to the surviving joint tenant.  The estate tax  is not an “inheritance tax” that taxes the recipients of property – under federal law, the recipients of an inheritance do not pay a tax when they inherit assets.

One of the reasons for the imposition of the estate tax was to prevent the accumulation of gigantic estates by the wealthy and powerful “robber-barons” who were amassing huge fortunes at the turn of the last century.  For example, if John Jacob Astor could accumulate an estate of 110 billion dollars (which he did – at today’s values  ) and leave it all to one son, that son could continue to build the family fortune and leave it to his son.  In a matter of generations, a few families could control most of the wealth in the nation.  So, the estate tax was created in part to encourage the break-up of large estates – by providing incentives for the wealthy to make gifts to charity (to get a deduction) and spouses (to get another deduction) and by allowing the government to take a percentage as well.

The MOST IMPORTANT FACT about the estate tax, is that it is only applied to the VERY RICH.  For example, before the Bush changes in 2001 (the “Economic Growth and Tax Relief Reconciliation Act”), only estates in excess of  $675,000 were subject to the tax.  Thus, a married couple could leave $1.5 million tax free.  Under the 2001 Act, the amount that could pass free increased to $1 million per person ($2 million per married couple) in 2002/2003, to $1.5 per person ($3 million per married couple) in 2004/2005, to $2 million per person ($4 million per married couple) in 2006-2008, to $3.5 million per person ($7 freaking million dollars per married couple) in 2009.  The maximum rate of the tax also declined over these years from 50% to 45%.

Thus, the bottom line – THE ESTATE TAX IS A TAX ON MILLIONAIRES!!!

NOW GET THIS – in that 2001 legislation that increased the amount of wealth that could pass tax-free, there was an amazing kicker – the estate tax was ENTIRELY REPEALED (cancelled) for the year 2010.  Congress could have changed this any time between 2001 and 2010, but, it didn’t.  So millionaires who die in 2010 will die without having to pay a cent in federal estate taxes!!!!

But, the way the law was drafted, the OLD (pre-Bush) estate tax rules will be revived in 2011 if no new laws are enacted.  The pre-2001 law permitted the transfer of $1 million and the top rate was 55%.

According to the Wall Street Journal, Congress is “incentivizing “ death  in 2010.  Imagine a wealthy man, on death’s doorstep in December, 2009 – that man would have a great incentive to stay alive until January 1, 2010 – he could save his family millions by dying in 2010 when the estate tax didn’t apply.  On the other hand, imagine a terminally ill person in December of 2010 – wouldn’t he have the opposite incentive?

The Wall Street Journal did the math “”on a $5 million estate, the tax consequence of dying a minute after midnight on January 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million”.  Is this an incentive to commit suicide?     Congress had nine years to fix this problem, but, it did not act.  Many believe Congress will not act this year either.  We shall see.


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