Sunday, August 30, 2009
This post is a counterpoint to Cy's de facto support of the Estate Tax. I say "de facto" because his argument was less in favor of the Estate Tax as a matter of course than it was a push to use it as a bargaining chip in the health care debate.
I have no problem unambiguously coming out against the estate tax, at least as it stands within the context of today's United States Tax Code.
There is a robust and effective industry dedicated specifically to helping families legally avoid the impact of the estate tax. Almost every brokerage house will offer either free or fee-based estate planning services once the size of your account triggers this level of service.
Normally, the account holder will be audited to determine how much income they actually need to maintain their standard of living. Normally, the older the account holder is, the less actual income they require. Even though medical costs increase with age, other expenditures decrease. A freshly minted retiree will require a larger disbursement from his available funds on an annual basis than a similarly well-heeled 85 year old.
Once the required income level is determined, fund are allocated to ensure that income stream. A basket of fixed income vehicles is constructed to provide the necessary income.
The next step is to set up a vehicle that a) protects wealth and b) allows for some asset growth. Normally, an irrevocable trust is set up to house all the assets that are to be shielded from estate taxes. The trust is like "limbo" for investments. Neither the account holder nor the beneficiary can access funds in the trust, and those funds are allowed to grow tax free until the account holder dies and the trust is executed. The assets that go into the trust are normally transformed from the usual suspects (stocks, bonds, etc.) and put into life insurance policies. Because the account holder is probably older and in not the best of health, the insurance policies are bought at face value and in incremental purchases. You can buy a 100,000 dollar life insurance policy for 100,000 dollars and the value of that policy will grow over time and the insurer will probably take a portion of the returns. The reason for using insurance as the investment of choice in the trust is that insurance benefits are tax exempt. If I die and my wife gets a million dollars from my life insurance policy, that doesn't count as taxable income.
After the "money" part of the equation is guarded and a reasonable balance is struck between income needs and shielded assets, tangible property can be shared or transferred so that when the account holder dies, less property "changes hands."
The net result of all this planning is that when the account holder passes on, the "estate" that is settled is beneath the minimum threshold for estate taxes to kick in. Normal probate costs apply and perhaps some state taxes and other nickel and dime things occur, but on the whole, a reasonably high percentage of the official estate seamlessly changes hands. Then, the irrevocable trust is executed and a cascade of insurance benefits are disbursed.
The point is... one person, with a shit-ton of money and the right planning can have significantly less of their accumulated wealth eroded upon their death than another person with an equal or even lesser estate, but incorrect or insufficient planning. An old rich guy who gets diagnosed with inoperable cancer can ensure that his wealth is protected before he expires whereas another, equally rich guy who gets hit by a bus might lose half of his assets to taxation.
And that is just on the functional, logical side of the coin... there is also a philosophical point to be made that the estate tax essentially taxes someone's death. On Monday, they have X money. On Tuesday, they die. On Wednesday, they have X/2 money. The only intervening action that caused the reduction in the amount of money in the family was one person's death. Sphere: Related Content