Keeping in mind my recent post showing continued political interest in legislation to repeal the “death tax”, careful observers are starting to make an argument that would have been implausible before Obama’s recent proposal to impose capital gains taxes on inherited property.
The new reasoning starts with the recognition that the estate tax now raises only about $7 Billion (estimated) per year, and affects only .2% of our population after increasing the exempt amount to $5.43 million per person. Estimates of the cost of collecting the tax, and the loss in revenue from income taxes on (greater, non-taxed) inherited wealth have led to wild eyed estimates that ending the estate tax would result in a net profit to the government. If we then add the unknown, but very significant potential for capital gains taxes on inherited property, the revenue argument to support the Estate Tax would disappear in favor of increased revenue via a trade off: legislators could agree to repeal the Estate Tax, in favor of a death time capital gains tax. Seen in this new light, Obama’s proposal may actually be the opening salvo in a gambit to end the death tax.
Part of the appeal of this new reasoning arises from the historic unwillingness of our government to impose an income tax (capital gains) and an estate tax (however small) at the same time-and death is an awkward time for such a one-two punch.
With technological progress compounding at ever astounding rates, death, as we now define it, may be optional for the wealthy, within fifty years, if not before. This further clouds the eventual outlook for estate taxes, and highlights the ultimate tax avoidance strategy.
From the Will Doctor’s vantage point, this all means that despite the major changes in transfer tax regimes in the last decade, there is little reason to think that we are entering a period of tax stability, and foreseeable consequences for our planning efforts on behalf of our clients. While planning has become more difficult for many families despite the liberalization of the Estate Tax system and the introduction of Portability, the potential rewards are becoming more ambiguous.
We firmly believe that understanding the tax environment and mitigating obvious potential liabilities continues to have value. However, the focus on the mult-generational protection of client assets, and assuring the passage of the wealth within the family bloodline (however defined) remains the paramount and crucial goal of modern planning. Helped by the development of dramatically improved Trust concepts in a growing number of States (Delaware, Nevada, New Hampshire, etc), this focus on the family and the successful protection and management of wealth is re-energizing those of us who remain committed to this rewarding area of legal practice.
Philosophically, the Will Doctor has always believed in a tax on the transfer of wealth, withing reasonable limits and at reasonable rates such as those that exist today. This arises from a desire to protect our democracy from being unduly influenced by individuals and families who amass great wealth which they (invariably) turn to political ends. To some greater of lesser extent, many of the great accumulators of wealth stand on the shoulders of all of our predecessors who laid the intellectual and scientific foundations for our current profitable endeavors-with ever present government support. The wheels of wealth accumulation are also greased by the infrastructure and body of laws and regulations which facilitate modern economies and markets, especially in America.
Therefore, it is important to consider another alternative: to continue with the tax on the transfer of large accumulations of wealth at death, but simplify its administration and close loopholes which we estate planners have so assiduously milked for many decades. Taxation is an important tool to encourage and discourage behavior, which society deems worthy, or harmful. We shudder to think of the effect of the repeal of estate taxes on the operations of the charities who benefit from the current tax law, especially in the politically fashionable environment of limited government and taxation. Who will take up the slack?
Hopefully, the debate about transfers of wealth, and related taxes, will again become imbued with considerations about the nature of our democracy, and its goals for all of us.