Good Article on Estate Tax Consequences

[kcjenkins]

http://online.wsj.com/article/SB10001424127887323639704579013040148683248.html?mod=djemBestOfTheWeb_h

Washington finally declared a truce on the death tax this year, with estates now taxed at 40% with an exemption of $5 million. President Obama insisted on preserving this tax to spread the wealth, though it raises less than 2% of federal revenue and discourages lifetime savings, as even a 1981 study by Mr. Obama's former chief economist Larry Summers showed.

Now the death-tax debate has shifted to state capitals, with mixed results depending on which party runs the state. Prior to 2001, states could impose an estate tax of up to 16% with no extra burden on their residents because a federal tax credit offset state estate taxes. That policy has ended and now state death levies are paid out of the assets of the deceased.

Four states—Indiana, North Carolina, Ohio and Tennessee—have reacted wisely by eliminating or phasing out their estate taxes. This leaves 18 states plus the District of Columbia that still impose a gift or estate levy. (See the nearby list.) Most of them still apply a 16% rate—as if federal rules haven't changed.

The grand prize for self-abuse goes to Minnesota, which this year enacted a new 10% gift tax with a $1 million exemption. A gift tax is a levy on money given away while still alive. This tax is in addition to Minnesota's 16% estate tax. The new law is all the more punitive because it applies the 16% estate tax (6% on top of the earlier 10% gift tax) to any gift within three years of death.

This is essentially a clawback tax, or more taxation without respiration. Democratic Governor Mark Dayton, who signed the law, is the heir to a department store fortune and knows a lot about inheriting wealth but not much about creating it.

Studies by Mr. Summers and many others conclude that successful people who have built up wealth continue to invest in the enterprise and save money in their later years in order to leave a legacy to their heirs. This accounts for the trillions of dollars of wealth passed from one generation to the next. The higher the tax rate the more this incentive for wealth creation is reduced. The combined federal and state death tax rate now approaches 50% in many states (after accounting for deductions). This explains why estate tax planning and avoidance is a booming industry.

State death taxes are especially futile because residents subject to the tax can avoid it by fleeing before they die. No less an ardent liberal than the late Senator Howard Metzenbaum moved to Florida from Ohio to avoid estate taxes after he retired from politics. A successful New York business owner with, say, $50 million of lifetime savings can move his family and company to Florida, Georgia, Texas or 29 other states and cut his death-tax liability by up to $8 million.

Thousands of Minnesota snow birds move to Florida during the winter months already, and so the new tax adds an extra financial incentive not to return. The Center for the American Experiment, a Minnesota research group, found that $3 billion of income has been lost to the state since 1995 after Minnesotans relocated to Florida and Arizona.

The think tank's conclusion should be required reading for policy makers in every state still imposing a death tax: "If enough people move away and stop paying Minnesota taxes, then Minnesota will experience a net revenue loss due to the estate and gift tax." This will mean that people making less than $1 million a year will be left paying the tab. So much for spreading the wealth.

[Lee B]

This article is the classic conclusion followed by selected facts to support the the desired result !

[SaraEA]

The estate tax was enacted to prevent families from amassing wealth over generations and becoming dynasties. Think about it. Without some curbs on inheritances, a child and grandchild and great grandchild born into the Campbell or Walton family would never ever have to work or pay a dime in taxes. In other words, they would never have to contribute anything to society.

The Warren Buffets and Rockefellers and Carnegies, and now even the Gates, have voiced their beliefs that the people of this nation helped them create their wealth and deserve a piece of it after they are gone. These ultra-wealthy have created trusts or foundations to give their fortunes back to the people. Seems wiser than paying an estate tax to the government that will only squander it.

Has anyone here ever done a federal 706? I haven't. In our firm we have prepared a few state 706s where the limit is much lower. Rich people didn't get that way because they're stupid.

[Catherine]

And yet, study after study shows that within two or three generations, the children, grand-children, and great-grand-children of the ultra-rich by and large ooze their way to the middle class. Dilution by generation, dilution of the work ethic and drive that their ancestor used to amass a fortune, a "spend spend spend!" mentality instead of a "save & invest!" mentality... the money ends up in the general economy, generating more tax receipts as it goes.

For the oligarchs and oligarch-connected, even the estate tax doesn't work -- they have set up family foundations and trusts decades in advance. Can anyone say "Kennedy?" Rose Kennedy, who lived in MA all her life and was uber-rich, was found, upon her death, to actually be a legal resident of Florida. Not subject to Mass. estate tax.

A cartoon in the New Yorker some years ago showed a couple of guys in suits in a high-rise office. One says to the other, "These new regulations are going to fundamentally alter the way we get around them."

And that's about it for the oligarchs and their nepots.

[Guest Taxed]

I should have trained to become a Financial Planner instead of a Tax Preparer?

[Catherine]

I should have trained to become a Financial Planner instead of a Tax Preparer?

I used to do that work and stopped years ago. The E&O insurance is filthy expensive (ten years ago it was over $5K/year); compliance paperwork requirements are onerous enough that you *must* have hired help to stay on top of it; you need a large "natural market" of sheep to fleece -- um, I mean clients to assist; and don't get aggravated by the multitudes of people who will simply not turn up for confirmed appointments (including not being at home when you show up to talk to them) -- I found it unworkable.

At least as someone who (1) refused to do anything but what was right for the client even if it put not a nickel in my pocket, (2) without a large "natural market," (3) without funds to hire help (even though it was less onerous a decade-plus ago), and (4) far too busy to want to deal with multiple missed appointments for which one cannot charge.

It also doesn't help that I am not a good salesman -- but then, I expected people to be grownups and able to make decisions, not to have to cajole and spoon-feed and pressure folks into taking action to protect themselves. It is true that every one of my clients back then was far better off for following my recommendations.

[Guest Taxed]

>>> not turn up for confirmed appointments

It sometimes happens in my practice also. Client does not show up on time. I call their phone get a VM. Then come to find out client wrote the wrong date on their calendar.

I will confirm an appointment made more than a week back.

I have also had a few instances where the client (usually a young person) was honest enough to tell me that they were a no show because they did not have money to pay my fees. Just had one last week the kid is on extension!