Night of the Living Death Tax Obama's budget quietly resurrects it in 2010. Lawrence Summers, President Obama's chief economic adviser, declared recently that "Let's be very clear: There are no, no tax increases this year. There are no, no tax increases next year." Oh yes, yes, there are. The President's budget calls for the largest increase in the death tax in U.S. history in 2010. The announcement of this tax increase is buried in footnote 1 on page 127 of the President's budget. That note reads: "The estate tax is maintained at its 2009 parameters." This means the death tax won't fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all. This controversy dates back to George W. Bush's first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return. And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn't seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is "fair" because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation. The importance of intergenerational wealth transfers was first measured in a National Bureau of Economic Research study in 1980. That study looked at wealth and savings over the first three-quarters of the 20th century and found that "intergenerational transfers account for the vast majority of aggregate U.S. capital formation." The co-author of that study was . . . Lawrence Summers. Many economists had previously believed in "the life-cycle theory" of savings, which postulates that workers are motivated to save with a goal of spending it down to zero in retirement. Mr. Summers and coauthor Laurence Kotlikoff showed that patterns of savings don't validate that model; they found that between 41% and 66% of capital stock was transferred either by bequests at death or through trusts and lifetime gifts. A major motivation for saving and building businesses is to pass assets on so children and grandchildren have a better life. What all this means is that the higher the estate tax, the lower the incentive to reinvest in family businesses. Former Congressional Budget Office director Douglas Holtz-Eakin recently used the Summers study as a springboard to compare the economic cost of a 45% estate tax versus a zero rate. He finds that the long-term impact of eliminating the death tax would be to increase small business capital investment by $1.6 trillion. This additional investment would create 1.5 million new jobs. In other words, by raising the estate tax in the name of fairness, Mr. Obama won't merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that's why the news of this unwise tax increase was hidden in a footnote. http://online.wsj.com/article/SB123846422014872229.html#printMode
Yeah the death tax sucks. Can't we just give our kids our money and property before we die in a controlled way, like a trust that gives us permanent residency in our home until death but actual deeds the property to the trust?
The Death Tax part of "The Unified Gift and Estate Tax Credit"..... Whether you gift property or bequeath it, the total amount before the tax kicks in is the same... one exception is the annual gift tax exclusion of $13,000 (indexed). That is, you can gift $13,000 to as many persons as you wish each year ($26,000 if married and making a joint gift)... any amount above that is subject to the Credit...
http://www.360financialliteracy.org...tax/How+can+I+minimize+taxes+on+my+estate.htm How can I minimize taxes on my estate? One way is to make lifetime gifts. Be aware, however, that certain lifetime gifts may trigger gift tax (Note: Though estate taxes will not be imposed in 2010, the gift tax remains in effect.). Gifts that do not trigger gift tax include the following: Gifts made to U.S. citizen spouses and certain charities Gifts of $114,000 or less made to non-U.S. citizen spouses (in 2004) Certain payments made for tuition or medical expenses on the behalf of others Gifts up to the annual gift tax exclusion amount of $11,000 Gifts made that fall under the gift tax applicable exclusion amount of $1 million (Note: Any portion of the gift tax applicable exclusion amount used for lifetime gifts effectively reduces the applicable exclusion amount that will be available for estate tax purposes.) See a tax attorney for more information about federal and state gifts taxes. Another common technique to minimize estate taxes is to create an irrevocable trust during your lifetime and transfer assets to the trust. To the extent that the assets you transfer to the trust exceed the applicable exclusion amount available in the year of your death, you may have to pay gift taxes on those assets. However, the taxes will be calculated on the value of the assets at the time of transfer, not on their potentially higher value at the time of your death. This can add up to significant estate tax savings if the assets are appreciating rapidly (e.g., real estate). Once in the irrevocable trust, these assets are forever removed from your estate. However, you should understand that to achieve this benefit, the assets transferred to your irrevocable trust can never be transferred back to you--the transfer is irreversible. They will remain in the trust until distributed to your beneficiaries according to the terms of your trust agreement. If you are not able or willing to transfer significant assets to a trust, you can set up an irrevocable trust to purchase life insurance on your life. Then, through premium gifts to the trust each year, the trustee can support the policy until your death. At your death, the life insurance proceeds completely escape any potential estate tax liability
How long has this option been available and I wonder what might be the odds of a rule change that would nullify this benefit? If the trust is irrevocable but the rules change it could be ugly. Any info or opinion will be appreciated.
I am against the Death Tax. However, this article conveniently glosses over the FACTS; is written in a biased manner and incorrectly asserts the claim that there was a "political expectation that once the estate tax was gone for even one year, it would never return." Says who? Where did this political expectation come from, and by whom??? The fact of the matter is that there WAS NO political expectation to begin with. Why? Because Congress has never gotten their act together to rescind the Estate Tax. Each time they try, the legislation gets piggy-backed with other legislation that is too unfavorable to swallow, and the effort to rescind the Estate Tax dies. For what it's worth, Congress approved the current tax schedule for Estate Taxes that expires after 2010 back in June of 2001. The amount you can leave your heirs tax-free back in 2005 was $1.5 million; in 2008 it ws $2.0 million. Now, under Obama's budget plan the amount you can leave your heirs that is tax-free goes to $3.5 million. 2001 $675,000 55% 2002 $1 million 50% 2003 $1 million 49% 2004 $1.5 million 48% 2005 $1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $3.5 million 45% 2010 repealed 0% 2011 $1 million 55% Conveniently, the author of this article fails to point out the above $3.5 million tax threshold is the highest of any of the years in the (Bush) Estate Tax schedule. http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
On a economic utility basis, this is all a crock of shit (but unfortunately, it's all too true). Congress enacts tax laws that they know won't collect anywhere near what is expected because those who will be affected by them can afford to hire an army of accountants, lawyers and insurance agents to get around the tax laws. The net result is that the politicians can scream the populist cry "We tax the rich", which in reality doesn't happen. Meanwhile a significant portion of economic wealth gets diverted from productive investments and instead is siphoned off to an unproductive segment of society (i.e. the segement which earns money from finding ways around the tax code). Of course the flat tax is the answer, but that'll never happen because it removes too much power from congress and the lobbyists.