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[Clive]

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[MediumTex]

Clive,

As recently as 2001, the U.S. estate tax started at $675,000.

I think that it will probably begin moving back toward that number in future years as the U.S. scrambles for more tax revenue and it becomes clear that the baby boomers dying off represents a historic opportunity for the government to harvest revenue.

There was no estate tax in place at all in 2010.  That was a great year for rich people to die.  George Steinbrenner (owner of New York Yankees) died in 2010, and he probably had an estate worth several hundred million dollars that would have been subject to the estate tax if he had died a few months earlier or later. 

[stone]

Medium Tex, do many US citizens use loop holes to avoid paying such taxes? In the UK there is a revolving door between being in the civil service drawing up the laws and working as tax advisers. Basically the laws are written so as to be avoidable for a fee to the knowledgable advisers -or that is the allegation anyway.

[Storm]

You might not realise how fortunate you are in the US.

UK death taxes start at around $500K amounts, above which you're taxed at something like 40%.

I only found out today that in the US you're allowed $5,000,000 tax exemption !!!

Clive, couldn't anyone with sufficient resources simply transfer their wealth to a US bank before their death?  Or, better yet, transfer the wealth to a country that has no inheritance tax at all.  Once the tax has been paid on that money and it is considered mine, as far as I can tell, the US or the UK can't stop us from expatriating it.

Worst case scenario: convert it to a briefcase full of gold and hand carry it to the Cayman islands.

[MediumTex]

Medium Tex, do many US citizens use loop holes to avoid paying such taxes? In the UK there is a revolving door between being in the civil service drawing up the laws and working as tax advisers. Basically the laws are written so as to be avoidable for a fee to the knowledgable advisers -or that is the allegation anyway.

Well, since I am a tax lawyer myself (though I don't do estate tax work), I can answer your question with an enthusiastic "YES!!!" , U.S. citizens use all manner of loopholes to avoid paying estate as well as all other taxes.

It's just a game of the government creating ever-more complex and exception-riddled rules, and the taxpayers and their advisors coming up with ever-more elaborate ways of getting around the rules.

The degree of complexity in the U.S. tax system is really astonishing.  It's much worse than most people could ever imagine...like orders of magnitude worse.  It's like an alternate reality of rules that are a combination of published guidance, informal guidance, folklore and idiosyncratic interpretation by government employees who themselves don't have a strong and nuanced understanding of all of the rules they are charged with enforcing.

It's a system in which unsophisticated taxpayers can be badly victimized, while very sophisticated taxpayers can almost completely escape taxation.

[moda0306]

MT,

I also work in tax and while I'm amazed with the complexity, I tend to think a few broad understandings will get most people into close to the position they should be, and I wonder what you're talking about with there being such a broad difference in taxation... maybe you are talking about the very wealthy and/or business owners, but most people seem to be in a pretty standard position...

Itemized deductions consist almost completely of state & local taxes and mortgage interest (limited at 1.1 million of equity... about $60k of interest), and charitables for most people.  Medical and miscellaneous are rarely a large piece of the deduction pie.

Income is a bit more complicated, but since most people earn wages I'll start there.  The vast majority of of a person's wages in a year are going to be taxable income, most likely, with health insurance and retirement contributions usually escaping taxation.  Payroll taxes are even more simple and unavoidable.  There are some extremely complicated areas of tax law here, but most of these areas don't tend to radicaly change the wage income that is being taxed for the average individual.

A simple act of moving a lot of your savings into tax-deferred accounts over the years can get you 90% of the way there in terms of taking advantage of this part of the tax code.

I will add that there are refundable credits that many of the poor or lower-middle class get.  Usually these can be planned around well, but probably aren't due to the foresight of the people/families involved.

Now when you talk about people nearing or at retirement, with businesses or with a lot of wealth... especially the last two... that's where good planning can really start making a difference, but not in such a totally skewed way, in my opinion, as you described.  Maybe you are talking more about international corporate taxation, which I agree is becoming a sham.

Could you elaborate on a few of the broader areas you feel that the tax code is not only complicated, but is so in such a way that vastly skews in unfair ways who pays taxes?

[MarySB]

What people seem to gloss over is that in five years Boomers will start taking mandatory distributions in the form of RMDs. This will be taxed as ordinary income. Maybe I'm not seeing something here?

[MediumTex]

What people seem to gloss over is that in five years Boomers will start taking mandatory distributions in the form of RMDs. This will be taxed as ordinary income. Maybe I'm not seeing something here?

You are correct, but I think that is a separate issue from the application of the estate tax.

[moda0306]

I don't think the RMD's are going to be a huge issue until the boomers start hitting an age at which the RMD's start becoming substantially more than they'd want to take out anyway.

Because of the way SS is taxed, especially if your state does it the same way, there exists a sizable taxable income range (starting at about a very modest income) where your fed/state effective marginal tax rate is almost 40%.

[Reub]

Is it too simple to state that inheritance taxes constitute double taxation and therefore should be eliminated or at least reduced? This wealth was taxed over a person's lifetime and should not be taxed a second time upon their death. Am I wrong?

[MediumTex]

Is it too simple to state that inheritance taxes constitute double taxation and therefore should be eliminated or at least reduced? This wealth was taxed over a person's lifetime and should not be taxed a second time upon their death. Am I wrong?

Oh sure, but lots of things are double taxed.

[Reub]

But isn't once enough?

[MediumTex]

But isn't once enough?

I think there is a backstory to the estate tax in that it is, in part, a fundraising tool for nonprofit organizations.  As I recall, the estate tax doesn't actually raise that much tax revenue; it just provides a steady market for estate planning professionals and a source of revenue for foundations.

[MarySB]

I was thinking that RMD's would be taxed once and then taxed again with the Estate Tax. Sorry, I did not mean to switch the issue.

[MediumTex]

I was thinking that RMD's would be taxed once and then taxed again with the Estate Tax. Sorry, I did not mean to switch the issue.

That's true, but so would the rest of a person's estate (assuming it was in excess of $5 million).

[MarySB]

I'm probably showing my ignorance here, but I thought a Trust could be set up to avoid the Estate tax. And, I thought that one could employ a stretch IRA to pass on to the younger generation any IRA funds that are more than one needed.

[MediumTex]

I'm probably showing my ignorance here, but I thought a Trust could be set up to avoid the Estate tax. And, I thought that one could employ a stretch IRA to pass on to the younger generation any IRA funds that are more than one needed.

Oh sure, there are a whole range of estate planning techniques to avoid the estate tax, and IRAs can certainly be configured to escape taxation for a VERY long time if the money isn't needed by the owner.

For estate tax purposes, the hardest trick for most people is making the $5 million in the first place.

[stone]

Medium Tex, you say that much of the point for estate tax is to channel money to foundations. I've wondered about the increasing power of foundations. Lets leave aside contentious political foundations and just consider foundations that everyone loves. Medical research is funded by the Howard Hughes Medical Institute in the US and the Wellcome Trust in the UK. Those got a legacy from a rich individual decades ago. Since then they have invested and the asset base has amassed capital gains to the extent that they can now fund (in the case of the Wellcome Trust) half the UK's medical research and yet still grow at a galloping rate.
People can vote to decide whether they want lots of resources devoted to medical research by government grants. Foundations seem entirely unaccountable and yet they channel huge resources. At what point do they become too powerfull? What if the Wellcome Trust were to control 50% GDP??? 

[MediumTex]

Medium Tex, you say that much of the point for estate tax is to channel money to foundations. I've wondered about the increasing power of foundations. Lets leave aside contentious political foundations and just consider foundations that everyone loves. Medical research is funded by the Howard Hughes Medical Institute in the US and the Wellcome Trust in the UK. Those got a legacy from a rich individual decades ago. Since then they have invested and the asset base has amassed capital gains to the extent that they can now fund (in the case of the Wellcome Trust) half the UK's medical research and yet still grow at a galloping rate.
People can vote to decide whether they want lots of resources devoted to medical research by government grants. Foundations seem entirely unaccountable and yet they channel huge resources. At what point do they become too powerfull? What if the Wellcome Trust were to control 50% GDP??? 

What sometimes happens is that when a foundation reaches a great enough size it will invariably put some clown in charge of the investments, and Wall Street will give the foundation's assets a good shearing.

McGeorge Bundy was the Lawrence Summers of the 1960s.  He was a Harvard professor, youngest president of Harvard in its history, advisor to Presidents Kennedy and Johnson and later president of the Ford Foundation.  In the early days of his tenure at the Ford Foundation, he criticized foundations for being overly conservative with their investments.  Based on Bundy's perceived legitimacy as a thinker and leader many foundations followed his lead, which in many cases led to disaster as foundations got more aggressive with their investments at precisely the wrong time as the 1966-1982 bear market unfolded.

Here is a 1975 newspaper article providing an overview of the whole sorry display of foundation hubris and Bundy's Pied Piper act.

[stone]

Medium Tex, the Wellcome Trust is managed by an ex-Goldman Sachs guy. It has done well under him I guess but I was startled that he seems a fixated inflationista. They don't hold any bonds because he says that inflation is coming and they have actually issued bonds themselves (AAA rated ). I suppose a bad dose of deflation could cut them down to size.

I'm always stuck by how people are up in arms about government spending money on "building monuments to themselves" but no-one minds having foundations skim resources off the economy to spend as the foundations see fit. Collectively we all end up contributing towards what ever the foundations do just as with government. Like I said, I happen to like what many foundations do (such as Wellcome trust etc) but I do think that they are funded by means of confiscation just as much as government is (I like some of what governments do too).

[KevinW]

I happen to like what many foundations do (such as Wellcome trust etc) but I do think that they are funded by means of confiscation just as much as government is (I like some of what governments do too).

All that money started out as willing charitable gifts...how is that confiscation?

[MediumTex]

I happen to like what many foundations do (such as Wellcome trust etc) but I do think that they are funded by means of confiscation just as much as government is (I like some of what governments do too).

All that money started out as willing charitable gifts...how is that confiscation?

I think the criticism is that the estate tax puts people in a position of either donating their wealth to charity or turning it over to the government following their death.

Simply doing what they want with their own property (which has already been taxed when initially earned) isn't one of the choices.

[stone]

KevinW, I agree that the initial seed was a willing charitable gift but that seems by the by when you consider how small that initial seed was in relation to the size of the investment earnings that currently fund what a large foundation does. Take the Wellcome Trust as an example. As recently as the late 1980s they only had £1B of assets. They now have £14B and fund projects at more than £700M per year.

[stone]

If you were to extrapolate things such that foundations owned most companies and many government assets became privatised and then purchased by foundations. Everyone would then become serfs of the foundations.

To some extent a foundation is a tax free investment bank. Many large foundations have an extensive staff of investment managers who are very well paid. I think in the USA there is a legal restriction that means that a certain proportion of the asset holding must be spent on charity each year. In the UK there is no such restriction. The AAA rating for the bonds issued by the Wellcome Trust made special note of that.

[KevinW]

I guess I'd lay the blame on the system of estate taxes and tax exemptions, rather than on the foundations.  There are indeed institutions that seem to be growing exponentially and stomping on everyone in their path in the process; charitable foundations don't seem, to me, to be one of them.