Financial News

[StrangeSox]

People as a whole might, but that doesn't say much about the top estates that get hit by the estate taxes that we're talking about. The people waiting in line for hours to save a couple hundred bucks on some electronics gadgets likely aren't the people to be heavily impacted by estate taxes in the first place. "Estate planning" isn't really a thing for most Americans.

 

Tax Policy Center has some numbers:

 

Roughly 33,500 estates filed returns in 2009 but fewer than half—only 14,700—of those estates had to pay any estate tax at all. Estate tax liability totaled $20.6 billion.

 

Estates must file tax returns within nine months of the decedent’s death and taxable estates usu-ally wait as long as possible before filing. Thus, most returns filed in 2009 were for people dying in 2008 when the estate tax exemption was $2 million. About 2.4 million people died in that year; of those, only 1 in 73 generated an estate tax return and only 1 in 166 had to pay any es-tate tax.

 

The 2010 act also allowed estates of people dying in 2010 to choose between the 2010 law with no estate tax but with limited step-up in basis and the 2011-2012 law with a $5 million exemp-tion, 35 percent tax rate, and full step-up in basis1. For some estates, getting step-up in basis for all assets can make it worthwhile to pay some estate tax.

 

After a single year hiatus in 2010, the estate rate will return in 2011 with a $5 million exemption. TPC projects that 8,600 estate tax returns will be filed for people who died in that year, of which only 3,300 will owe estate tax totaling about $10.6 billion.

 

In 2013 the estate tax exemption will drop to $1 million and many more estates will have to file returns. TPC estimates that 114,600 estates of people dying that year will file estate tax returns and 52,500 of those estates will pay taxes totaling over $40 billion.

 

That's an estimated 52,500 estates out of the 2.4M Americans who die annually. Considering that the bottom 60% of Americans hold only 4.2% of the net wealth and that only 7,274 households had a net income exceeding $1M in 2007, the estate tax can't really be considered to have a broad impact on spending or savings habits.

 

[Y2HH]

People as a whole might, but that doesn't say much about the top estates that get hit by the estate taxes that we're talking about. The people waiting in line for hours to save a couple hundred bucks on some electronics gadgets likely aren't the people to be heavily impacted by estate taxes in the first place. "Estate planning" isn't really a thing for most Americans.

 

Tax Policy Center has some numbers:

 

 

 

That's an estimated 52,500 estates out of the 2.4M Americans who die annually. Considering that the bottom 60% of Americans hold only 4.2% of the net wealth and that only 7,274 households had a net income exceeding $1M in 2007, the estate tax can't really be considered to have a broad impact on spending or savings habits.

 

My problem with it is that it's still money that's already been taxed, it doesn't have to affect me personally to see how unfair that is. Taxing success is one thing...taxing success multiple times is another, and it becomes a form of punishment. Be successful...but don't be too successful...and if you are too successful, spend all of your money immediately or you'll lose a bunch of it because you happened to die.

 

Believe me, those who inherit will spend it anyway...the saying 3 generations shirtsleeves to shirtsleeves exists for a reason.

[StrangeSox]

You lose every cent when you die regardless of what happens to your estate afterwards.

 

The estate tax is a boon to charitable organizations and helps work against unearned wealth and aristocracy. I see nothing unfair about it, nor do I see it as "punishment." Much of the wealth subject to estate taxes is unrealized capital gains, anyway, meaning that it hasn't been taxed previously and may never be taxed if there's no estate tax.

[StrangeSox]

Just to throw this in for discussion... there is a key difference between land holdings, and financial investment instruments: liquidity. If you inheret some big farm or ranch, and suddenly owe a large tax bill on it... how do you pay for that? You can sell the land itself, but that defeats the purpose of inheritance (in part). If you are given money, or stock, or bonds, etc., you can sell it in part to cover the taxes.

 

I realize that, on the other hand, the land also has value and is therefore a large income by device. Perhaps the solution here is, for illiquid assets, allow for a long-term payment schedule of taxes. You could put a tax lien of sorts on the property, like a tax mortgage or escrow type scenario, and allow for percentage payments over time. At least that way you won't prompt rapid sales that diminish the value of the relatively illiquid assets.

 

digging around for some other stuff, I came across this from CBPP:

 

These findings are consistent with a 2005 CBO study that exploded the myth that many small

businesses and farms have to be liquidated to pay the estate tax. CBO found that of the few farm

and family business estates that would owe any estate tax under the 2009 rules, the overwhelming

majority would have sufficient liquid assets (such as bank accounts, stocks, bonds, and insurance) in

the estate to pay the tax without having to touch the farm or business.

 

Furthermore, for the few taxable estates that would face any liquidity constraints, there are special

provisions written into the law for them — such as the option to spread estate tax payments over a

15-year period and at low interest rates — that would allow them to pay the tax without having to

sell off any of the farm assets.

 

They don't source this, but it appears to be valid:

 

http://extension.missouri.edu/p/G508

 

When are estate taxes due?

 

Estate taxes normally are due nine months after the death of the estate owner. However, you may be granted up to a 10-year extension if you can show reasonable cause explaining why payment is impossible or impractical at that time. This extension is not automatic. The estate must pay interest on the balance due for the extension period. The interest rate is based on the prime rate charged by banks during the six-month periods ending March 31 and Sept. 30 each year. To apply for an extension, you must file IRS Form 4768 early enough to allow the IRS time to consider the application and reply before the initial nine-month period expires. Include with Form 4768 a detailed written statement explaining why you cannot pay the estate tax when originally due.

 

Examples of "reasonable cause" are:

 

Assets are located in several legal jurisdictions outside your immediate control.

Assets consist of rights to receive payments in the future, such as royalties, annuities and accounts receivable.

The value of the estate cannot be determined by the date due or assets cannot be collected without a lawsuit.

You have made a reasonable effort and are unable to convert assets into cash. To borrow to pay the tax, you will have to pay an unusually high interest rate.

 

A separate provision, IRS Code Section 6166, allows you to pay the estate taxes due on a closely held family business in installments over a 15-year period if the business remains in the family.

[NorthSideSox72]

digging around for some other stuff, I came across this from CBPP:

 

 

 

They don't source this, but it appears to be valid:

 

http://extension.missouri.edu/p/G508

That's a good start, thanks. Though I don't think there needs to be an filed exemption process to prove those things - just base it on asset type, and therefore liquidity. Makes the process more fair and more efficient.

 

And you have to pay interest - I don't like that part. It is a penalty, and I don't feel there should be a penalty for this, since they were basically given a situation and did not do anything wrong.

 

 

[Y2HH]

You lose every cent when you die regardless of what happens to your estate afterwards.

 

The estate tax is a boon to charitable organizations and helps work against unearned wealth and aristocracy. I see nothing unfair about it, nor do I see it as "punishment." Much of the wealth subject to estate taxes is unrealized capital gains, anyway, meaning that it hasn't been taxed previously and may never be taxed if there's no estate tax.

 

Troll post.

 

We are talking about estates and inheritance here, so for you to even add this silliness to the conversation is, well...silly. Allow me to repeat: Since we're talking about estates/inheritance, I figured everyone here already understood that the person that earned it all died and "lost everything". The fact that they want to pass it down to their family, whom the lived and worked for, is the point of the conversation to begin with.

[Y2HH]

...also, to further dismiss your silliness...unrealized gains will eventually be realized and therefore taxed. Let's not pretend they won't be...which you appear to be really good at doing (pretending).

Edited December 3, 2012 by Y2HH

[StrangeSox]

It's an important point, imo, that undercuts arguments that the estate tax may be immoral or that it is a "death tax." My issue was with the way you framed your point and I think that framing reveals a flaw in the argument you were making. "You" don't lose any of your wealth via the estate tax because you are dead. Choosing to spend some of it now to decrease your estate's taxes for your future heirs benefits you and not them. There's a difference there and I think its worthwhile not to lose sight of it. Though you did concede that the estate tax encourages spending over wealth-hording.

[StrangeSox]

...also, to further dismiss your silliness...unrealized gains will eventually be realized and therefore taxed. Let's not pretend they won't be...which you appear to be really good at doing (pretending).

 

Not if the basis is stepped-up at death/transfer without taxation, but either way, it's a way to shelter capital gains from taxation for generations. And if you're that wealthy, you can secure credit against those untaxed assets, essentially gaining access to those capital gains without officially realizing them. This is pretty much what Zuckerberg was doing when Facebook went public:

 

http://www.nytimes.com/2012/02/08/opinion/...g-tax.html?_r=1

 

But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.

 

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

[Y2HH]

It's an important point, imo, that undercuts arguments that the estate tax may be immoral or that it is a "death tax." My issue was with the way you framed your point and I think that framing reveals a flaw in the argument you were making. "You" don't lose any of your wealth via the estate tax because you are dead. Choosing to spend some of it now to decrease your estate's taxes for your future heirs benefits you and not them. There's a difference there and I think its worthwhile not to lose sight of it. Though you did concede that the estate tax encourages spending over wealth-hording.

 

I was speaking more on it being unfair because you're family is essentially being punished because you happened to die, and worse, it's on money that you -- the person dying -- have already paid taxes on. Any "unrealized" gains are still at that point unrealized and on paper, when/if that paper is cashed in, they will pay taxes on those then realized gains.

 

I'm not a fan of sin tax or death tax...and I never will be.

 

Edit: I don't like the idea of the government double dipping, which is what this is. I'm not even talking about you paying income tax and then having to pay sales tax after that. This is taxed money being re-taxed because you died, because the government is allowed to draw and arbitrary line in the sand as to what they feel is "too much". It shouldn't matter how much it is, so long as they've already paid the taxes on it, IMO, at that point, the government is overstepping it's bounds and taking confiscating what doesn't belong to them.

Edited December 3, 2012 by Y2HH

[cabiness42]

OK, I am not anything close to an economist, but I've always wondered this and the post 2 posts above made me decide to bring it up: I know that a blanket Federal Sales Tax would be too regressive, but what about a Federal Luxury Sales Tax? Tax only certain items, and only above a certain amount. Something like:

 

Tax all auto/boat purchases above $20,000

Tax all jewelry purchases over $1000

Tax all real estate purchases over $200,000

Tax all personal aircraft purchases.

 

Rich people aren't going to stop buying that stuff just because it starts costing 10% more, and loopholes might be harder to find than in the income tax code. And the items above and the benchmark prices aren't set in stone, just suggestions to get the ball rolling.

 

Oh, and on a completely unrelated note, stop printing $1 bills. That saves the government a ton of expense right there.

Edited December 3, 2012 by HickoryHuskers

[Y2HH]

OK, I am not anything close to an economist, but I've always wondered this and the post 2 posts above made me decide to bring it up: I know that a blanket Federal Sales Tax would be too regressive, but what about a Federal Luxury Sales Tax? Tax only certain items, and only above a certain amount. Something like:

 

Tax all auto/boat purchases above $20,000

Tax all jewelry purchases over $1000

Tax all real estate purchases over $200,000

Tax all personal aircraft purchases.

 

Rich people aren't going to stop buying that stuff just because it starts costing 10% more, and loopholes might be harder to find than in the income tax code. And the items above and the benchmark prices aren't set in stone, just suggestions to get the ball rolling.

 

Oh, and on a completely unrelated note, stop printing $1 bills. That saves the government a ton of expense right there.

 

All auto purchases above 20k? That's like every car on the planet.

 

None of those numbers you listed could possibly be considered "luxury" other than the aircraft purchases.

 

...and i actually feel the federal Government SHOULD institute a small consumption tax, and when they do that, cap state/county/city aggregate sales taxes to a certain point combined with the federal tax.

 

Like I told people before...almost nobody that lives in IL benefited from the Bush/Obama tax cuts. Any tax cuts we received on a federal level we lost on a local/state level. Every penny.

Edited December 3, 2012 by Y2HH

[StrangeSox]

Your heirs aren't being punished in any way. Money that was not theirs and that they did nothing to earn is being subject to a tax before it becomes theirs, and only on estates in the top 0.01% (currently, that will change to ~ top 1% if it drops down to $1M exemption).

 

Estates of that size are often comprised of unrealized and untaxed gains that have their basis re-adjusted at the time of death. The inheritors can either borrow money against these unrealized gains (e.g. Zuckerberg) or they may be able to sell them gains-tax-free anyway, as Steve Jobs' wife was able to do:

 

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

[StrangeSox]

All auto purchases above 20k? That's like every car on the planet.

 

None of those numbers you listed could possibly be considered "luxury" other than the aircraft purchases.

 

How many people make jewelry purchases above $1k more than a handful of times in their lives?

[Y2HH]

Your heirs aren't being punished in any way. Money that was not theirs and that they did nothing to earn is being subject to a tax before it becomes theirs, and only on estates in the top 0.01% (currently, that will change to ~ top 1% if it drops down to $1M exemption).

 

Estates of that size are often comprised of unrealized and untaxed gains that have their basis re-adjusted at the time of death. The inheritors can either borrow money against these unrealized gains (e.g. Zuckerberg) or they may be able to sell them gains-tax-free anyway, as Steve Jobs' wife was able to do:

 

I don't believe that's how it works.

 

Whatever price he initially received the shares at is his strike. His strike doesn't change for her...she would still owe money on the profits minus strike...

 

Also, when it comes to things like this...this is why they need to simplify the tax code...so things like this wouldn't happen.

 

I still don't agree with an estate/death tax on money that's already been taxed...but I also don't agree on sheltering it -- but you have to remember, the people taxing them CREATED these shelters. They should do away with them, and then they don't have to worry about this.

Edited December 3, 2012 by Y2HH

[Y2HH]

How many people make jewelry purchases above $1k more than a handful of times in their lives?

 

A lot? A 1k jewelry purchase isn't that much. You don't have to be anywhere near rich for this to be true. And even if it's just a few times...1k just seems too low. Now you're penalizing people that may want to do something extra special once or twice in their lives? Luxury to me in this regard would be over 5k, and for an engagement, over 10k.

Edited December 3, 2012 by Y2HH

[StrangeSox]

I don't believe that's how it works.

 

Whatever price he initially received the shares at is his strike. His strike doesn't change for her...she would still owe money on the profits minus strike...

 

The author of that piece is a tax lawyer and it jives with what I've turned up googling:

 

https://www.google.com/search?q=step-up+bas...me&ie=UTF-8

 

The case of a spouse is a bit unique since they pay zero estate tax anyway, but let's assume the same situation but with a son or daughter. With the estate tax, the estate will pay up to 35% tax on all assets above the $5.1M exemption as valued at the time of death. When the estate satisfies its tax burden and the shares are transferred to the son or daughter, the new basis for those shares is the current value, not what was originally paid. So, for instance, if your father bought land in 1960 for $80,000 that was now worth $5,000,000, when you go to sell it, you would not be paying taxes on $4,920,000 in cg's. If there was no estate tax below $5M, those capital gains will go completely untaxed and your father could have borrowed against that $5M land as a source of income.

 

Having no estate tax will foster generational wealth and an even-larger wealth disparity.

[StrangeSox]

A lot? A 1k jewelry purchase isn't that much. You don't have to be anywhere near rich for this to be true. And even if it's just a few times...1k just seems too low. Now you're penalizing people that may want to do something extra special once or twice in their lives? Luxury to me in this regard would be over 5k, and for an engagement, over 10k.

 

I have no idea on the merits of HH's proposal, but jewelry is the easiest example of a "luxury good" you can think of.

[Y2HH]

The author of that piece is a tax lawyer and it jives with what I've turned up googling:

 

https://www.google.com/search?q=step-up+bas...me&ie=UTF-8

 

The case of a spouse is a bit unique since they pay zero estate tax anyway, but let's assume the same situation but with a son or daughter. With the estate tax, the estate will pay up to 35% tax on all assets above the $5.1M exemption as valued at the time of death. When the estate satisfies its tax burden and the shares are transferred to the son or daughter, the new basis for those shares is the current value, not what was originally paid. So, for instance, if your father bought land in 1960 for $80,000 that was now worth $5,000,000, when you go to sell it, you would not be paying taxes on $4,920,000 in cg's. If there was no estate tax below $5M, those capital gains will go completely untaxed and your father could have borrowed against that $5M land as a source of income.

 

Having no estate tax will foster generational wealth and an even-larger wealth disparity.

 

I actually amended my post about this...

 

The problem with this is they're sheltering...shelters the government created. So the government created the problem themselves by creating complex tax loopholes/shelters...and then to fix it, rather than removing such loopholes/shelters, they decide they're going to just add a death tax?

 

I'd have less of a problem with them removing shelters/loopholes than instituting a death tax to fix a problem they created.

[cabiness42]

All auto purchases above 20k? That's like every car on the planet.

 

None of those numbers you listed could possibly be considered "luxury" other than the aircraft purchases.

 

...and i actually feel the federal Government SHOULD institute a small consumption tax, and when they do that, cap state/county/city aggregate sales taxes to a certain point combined with the federal tax.

 

Like I told people before...almost nobody that lives in IL benefited from the Bush/Obama tax cuts. Any tax cuts we received on a federal level we lost on a local/state level. Every penny.

 

Let me point out that my proposal only taxes you on dollars over that amount. So if you buy a 22K car, you only pay sales tax on 2K of it. Same with jewelry--you only pay tax on the amount over 1K. Let me also point out that the numbers are just ones I threw out there and I'm more interested in debating the concept rather than the specific numbers. However, the point isn't to only tax the super-rich. The middle class is going to pay some too, but not a ton.

Edited December 3, 2012 by HickoryHuskers

[Y2HH]

I have no idea on the merits of HH's proposal, but jewelry is the easiest example of a "luxury good" you can think of.

 

Well, that much is true...it just bothers me that we're setting a number that low when inflation could make that 1k look like 100$ in a decade.

 

I think it should be an aggregate amount of jewelry...not a one time purchase that happened to hit 1,000$.

 

I have no problem with luxury taxes...but the numbers have to be set high enough that they are true luxury.

 

20k for a car when practially any new car costs 20k is too low.

 

200k for a house? I paid more than that for mine, and I have a rather small/modest house.

[cabiness42]

A lot? A 1k jewelry purchase isn't that much. You don't have to be anywhere near rich for this to be true. And even if it's just a few times...1k just seems too low. Now you're penalizing people that may want to do something extra special once or twice in their lives? Luxury to me in this regard would be over 5k, and for an engagement, over 10k.

 

But if you only do it once or twice in your life, then you're only paying once or twice, and it's only on the amount over 1K. So if you buy one 5K engagement ring you pay tax one time on 4K of that, and if you have to buy a ring that costs a couple hundred bucks less to be able to afford the tax, you're still getting a very similar ring.

[Y2HH]

But if you only do it once or twice in your life, then you're only paying once or twice, and it's only on the amount over 1K. So if you buy one 5K engagement ring you pay tax one time on 4K of that, and if you have to buy a ring that costs a couple hundred bucks less to be able to afford the tax, you're still getting a very similar ring.

 

But that's not what luxury is IMO. That could be a one time special circumstance for a person.

 

Luxury to me isn't a 30,000 Jeep. It's a 125,000 Viper, it's a Porsche 911, etc...

 

Luxury to me isn't a 1000 watch, it's a 5000$ Rolex.

[StrangeSox]

Estate taxes weren't proposed and implemented in response to capital gains sheltering. It's an ancient practice, but it was originally instituted in the US in the 1860's. It's current form dates to 1916.

[cabiness42]

But that's not what luxury is IMO. That could be a one time special circumstance for a person.

 

Luxury to me isn't a 30,000 Jeep. It's a 125,000 Viper, it's a Porsche 911, etc...

 

Luxury to me isn't a 1000 watch, it's a 5000$ Rolex.

 

Again, it's more about the concept than the specific numbers, but maybe it's graduated. Sales tax on cars is 3% at 20K, 6% at 50K, and 10% at 100K, or something like that.

 

You can buy a new Camry/Fusion for around 22K, so in a sense it is somewhat of a luxury to be able to afford anything substantially more than that.