The Internal Revenue Service defines the death tax, properly known as the estate tax, as a tax on your right to transfer property at your death. You have the right to transfer assets to your loved ones but the Federal government asserts its right to tax your right. Here, two rights make a wrong.
For the past 15 years the amount of revenue generated by estate taxes has never exceeded 1.6% of all tax revenues collected by the Federal Government. Only 47,320 estate tax returns were filed 2009. The IRS asserts that in its current form, the estate tax only affects the wealthiest 2 percent of all Americans.
Despite the limited number of Americans who are actually affected by the tax, many millions of Americans with substantial assets are rightfully concerned about the estate tax. The estate tax is mind-numbingly complicated. It causes fear of the future because it is unpredictable and arbitrary. A whole industry of attorneys, accountants, financial planners, banks and insurance companies are paid very well to solve problems and address the fears caused by this tax.
You must account for everything you own or have certain interests in at the date of death. Property to be accounted for includes:
* real estate
* life insurance proceeds
* business interests
* and any other asset you own at date of death.
The fair market value of these items is used. The total of all of these items is your “Gross Estate.” Once you have accounted for the Gross Estate you are allowed deductions in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit.
This unified credit is the problem. How much is it? In the years 2004 and 2005 it was $1,500,000. In the years 2006, 2007 and 2008 it was $2,000,000. In the year 2009 it was $3,500,000. This year, 2010, there is no estate tax and is in effect replaced by a capital gains tax.
In the year 2011 taxable estates and lifetime gifts that exceed $1,000,000 will have to pay tax. Currently there are around 5 million Americans who have over $1,000,000. Many more Americans who aspire to own more than $1,000,000 in assets must take into account the estate tax.
The estate tax is not used to generate revenues, but is an instrument of public policy. The 5 million American millionaires control over 50% of all wealth in America. Keep in mind there are over 330 million Americans who among themselves own the other one-half of American Wealth. The estate tax is an attempt to break up concentrations of wealth. The legacy of one billionaire provides a stark example.
Dan L. Duncan died in late March, 2010 of a brain hemorrhage at 77. Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world. Had his life ended three months earlier in 2009 his $9 billion would have been subject to a federal tax of at least 45 percent. Had he lived past December 31, 2010 his $9 billion would have been subject to a tax rate of 55 percent. Because of the timing of his death his children and grandchildren will receive $9 billion free of any estate tax. Because of the timing of Mr. Duncan’s death he avoided $4.5 billion in estate tax.
If you are a resident of California you do not have to worry about a California death tax. Revenue and Taxation Code Section 13301 adamantly states: “Neither the state nor any political subdivision of the state shall impose any gift, inheritance, succession, legacy, income, or estate tax, or any other tax, on gifts or on the estate or inheritance of any person or on or by reason of any transfer occurring by reason of a death.”
Public policy against concentrations of wealth uses the estate tax as a blunt instrument to prevent concentrations of wealth and is not effective. Yet the politics of Republicans and Democrats have turned when one dies into a tax planning strategy and tragedy. The legacy of the “death tax” will live on.