Tax reform is on the table again, and it’s time to start looking at the individual parts of the code up for discussion. Today, I’d like to look at the estate tax. Those who want to repeal it entirely are fond of calling the ‘Death Tax’, as that will stir up some repulsion in their constituents, and support for them.
First, let’s look at a bit of the history of the estate tax. In 2001, shortly after my daughter was born, the exemption was $675K. At that time, my wife and I were going to do the ‘responsible’ thing and get life insurance, term policies. $1M each, which was pretty cheap at the time as we were still young. But this meant that if we died, we would leave our child $2M of which $700K would be subject to tax. On top of that, our 401(k) and IRAs would add to this number, and every bit of it taxed. Even at that earlier stage of investing, I knew enough to start planning. $2000 and one trust later, we did not own the insurance, it was owned by the trust, and bought with money gifted to our daughter. The estate tax was always up for discussion and it quickly was raised in the late 2000’s. In 2017, it’s $5.49M per person. And there’s a little additional benefit, the preservation of the exemption for the second to die spouse. This means that if I die tomorrow, in effect, my wife can leave our daughter the $10.98M with no tax due. Just a form to send in when I meet my maker. No need for any lawyer or trust. And no, we’re nowhere close to worrying about hitting that number. Further, we can gift her $28K/year from now until we pass. That’s close to another million dollars. And $28K/yr to her spouse if and when she gets married, or even to her ‘special friend’ if she stays single, and we’re generous. When you bring on the grandkids, the numbers multiply up fast. A couple with 2 children and 4 grandkids has 8 people to gift to (including the spouses) which adds to $224K/yr under the current limits. If one has the money and sufficient offspring, it’s not tough to gift away another $6M or so depending on the situation.
When you look at the distribution of wealth, the data show that only the top .2%, 1 in 500, estates owe any tax at all, and for those who just go over, the tax is minimal. It gets to be quite a bit when billionaires pass away. Say someone worth $10B passes. The $10.98M exemption is tiny compared to this number, and the estate can owe close to $4B.
When politicians push for this cut, until now, it wasn’t because they were rich, that tax wasn’t likely to affect them either. They had some very large donor whose money they wanted to keep flowing. The politicians are great marketers, talking about the ‘small farms and family businesses’ hurt by the estate tax. Let’s talk about farms for just a moment.
Exact numbers aren’t easy to come by, but we have a good hint. Only 3% of family farms have sales over $1M. This results in a value of $5M or so, given that $1M isn’t profit, but gross sales. This type of business is typically valued at 7X profits. It’s not hard to assume that to get past $11M in value we are at fewer than 1% of farms. Now, if the whole point is that the kids want to keep the farm and stay with the business, it would be easy to use the strategies I suggested above. Giving not money, but a percentage each year. Yes, it takes a tax attorney, and yes, the tax code is convoluted, but we are back to the “family farm” rarely being lost to estate taxes. The repealers post, tweet, and write about it as if each and everyone in the country should be outraged over this tax, while 41% of us are not even making $15 per hour. They would like to give their wealth patrons this windfall, but will look to cut SNAP funding by $125B, cut Pell Grants and other pro-college funding, and perhaps worst of all, repeal the ACA.
If you are in favor of repeal, would you mind dropping me a note and explaining why you support it? Given how few will benefit from repeal, I’m very curious. I’ve never heard a real legitimate reason.