Fix The Tax Code Friday: Estate Tax

2007 February 23
tags:
by Kelly

When Congress first introduced the wacky legislation that is the current federal estate tax situation (an exemption that gradually rises to $3.5 million per person, is eliminated in the year 2010 and returns in 2011 to its "old self") most folks assumed we had plenty of time to fix it. 2010 seemed years away.  Now, 2010 is a lot closer than 2001 (the year the change took effect) and we have no real plan.  What should we do?  So this week’s question is:

What should happen to the federal estate tax?  Should it be eliminated?  Should we keep the exemption at the top rate ($3,500,000)?  Should we keep the exemption in its 2011 rate ($1,000,000)?  Or is the answer somewhere in the middle?

from → estate & gift, fix the tax code friday

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2007 February 23
Suz

Keep the exemption at the 2011 rate of 1 mill. Heck, I’ll probably never amass that much and so those of us who make a good living, but aren’t weathly get a break and those who are wealthy pay. Seems fair to tax those who have more at a higher rate to me.

2008 May 20
NO ONE

ELIMINATE IT! YOU CANT TAKE IT WITH YOU, BUT YOU CANT GIVE IT FREELY TO YOUR OWN KIN WITHOUT THE GOVT. WITH THEIR HANDS OUT TO COLLECT THEIR SHARE OF MONEY THAT HAS ALREADY BEEN TAXED WHEN IT WAS EARNED, TAXED AS ASSETS, PROPERTY, AND EVEN ON ALL INTEREST MADE TIL YOU DIE, SO WHY MAKE IT SO COSTLY AND INTRUSIVE TO WHAT SHOULD BE PRIVATE AND KEPT BETWEEN FAMILY MEMBERS? DEATH IS HARD ENOUGH AND A FAMILIES ESTATE SHOULD NOT MAKE THE TAXMAN NUMBER ONE TO BENEFIT ESPECIALLY WHEN IT FORCES SELLING THE FAMILY HOME AS IT MORE THAN OFTEN DOES-JUST TO PAY THE TAX “OWED”- VERY MESSED UP!

2008 May 20
Chris Coyle

The estate (gift and GST) tax is an effective tax on otherwise untaxed wealth accumulation; its a large potential source of revenue. The $1MM exemption is going to be too small to properly effectuate the purposes of the estate tax — to tax mostly otherwise unreached appreciation.

The above comment belies a naive understanding of the tax — in exchange for the estate tax, beneficiaries take property with a stepped up basis. To the extent that the estate tax is repealed, this step-up in basis should also be repealed. While this would help keep the family farm in the family, it defeats the larger social goals of transferablity. The property can’t be transferred because no one can (or will) afford the tax on the sale.

For this reason, the estate tax should stay. The exemption should be increased to the 2009 level (3.5MM) and then pegged to the inflation index. This solves the problem of (1) having to revisit it and (2) avoiding an AMT-like screw-up that would require last-minute fixing.

2008 May 20
Kelly

Chris,
Thanks. I also believe it will stay - while an unpopular tax in principle, it doesn’t affect that many taxpayers (<2% before the increase). With a bad economy, if you’re looking to eliminate or lower taxes, this is not the one to focus on - it would be political suicide.
At one point, I know the GOP offered a $10 million cap as a compromise to no federal estate tax. Most practitioners that I know believe that it will fall between $3.5 million as you suggested and $5 million.
To be honest, I thought that this argument would be resolved long before 2009. When the last version of the bill which increased the exemptions was passed, I believed that it would be changed within year or two. And here it is mid-2008 already. Crazy!

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