MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: This has nothing to do with whether you’re a Republican, a Democrat or a disciple of the Rev. Sun Myung Moon. It has do with the incredibly dumb things the party in control of Congress (currently the GOP) tries to get away with when they think no one is watching. Case in point: The failed attempt in the U.S. Senate last week to permanently eliminate the estate tax. Don’t get me wrong, I am no fan of the tax in its present form, but with gasoline at $3.50 a gallon and deficits wildly out of control did our lawmakers really think their constituents would be pleased if they managed to eliminate a tax that impacts only the top 1 percent of wealthiest Americans? Talk about your lousy timing. Death taxes have never really been about the national treasury—estate taxes account for only a tiny fraction of federal tax revenues. Nor has it really been about saving the family farm or America's small-business community—at most, 3 percent to 4 percent of these enterprises will be affected and most can avoid any real problems through intelligent tax planning. No, this battle has always been about good old fashioned class warfare—a classic case of the “Joe Lunchbucket” versus “Executive Eddie”. The current estate tax situation, which went into effect during President Bush’s first term, is an absolute mess. The tax, which applies to estates in excess of $2 million for individuals and $4 million for married couples is gradually being phased out and will be eliminated in its entirety in 2010. But then in 2011, in a resurrection routine that would make Lazarus proud, it reappears and reverts back to the rates that existed before 2001. Imagine the ethical dilemma for wealthy families come New Year’s Eve in 2010 as they gather around Grandpa’s hospital bed knowing that the only thing that separates Gramps from heaven and them from millions in estate taxes is a couple of IV tubes. Heck, assisted suicide could become America’s favorite pastime that year. It might even spawn a new reality TV program: “Who will save his heirs the most in taxes by dying before midnight?” To be fair, the government has tried to soften the blow of estate taxes and has raised the exemption seventeen times since 1977 when it stood at a paltry $60,000. The modern estate tax was enacted in 1916, just three years after the federal income tax. In part to limit estate tax avoidance, Congress supplemented it with the gift tax in 1924. The gift tax was quickly repealed in 1926 but was reintroduced in 1932. Before the enactment of the gift tax, some taxpayers were able to largely avoid estate taxes by simply transferring assets while they were alive, a practice that led to widespread tax avoidance. Today, the current federal estate tax—along with the generation-skipping transfer tax—exempts the first $2 million of estates. The federal gift tax allows tax-free gifts of up to $12,000 per year, and exempts total lifetime gifts up to $1 million. Estates and gifts beyond these amounts are taxed at progressive marginal rates ranging from 18 percent to 47 percent. What the government giveth they also taketh away. Few people realize that combined with the repeal of estate taxes in 2010 is an elimination of the so called “carry-over basis” which shields many estate assets from capital gains taxes. Typically if you buy an asset for $100,000 and later sell it for $500,000 you are subject to a capital gains tax on the difference. But if you keep the asset until you die and let your heirs sell it, all that gain is forgiven. But this will no longer be the case once estate taxes are repealed. Only $1.3 million of an estate’s gain will be shielded from capital gains taxes ($3 million if the transfer is to your spouse). So many estates that would not have faced either an estate tax or capital gains taxes under current law could end up paying even more.▲

Vote to repeal estate tax law fails...

Volume 17, Issue 12

June 12, 2006

Death Tax Still Alive and Kicking