Archives for 2011

How Estate Taxes Hurt the Poor

Top HatOver the years, many clients have walked into my office with the goal (usually among several others) of eliminating, or at least minimizing, their family’s exposure to estate taxes.

And I’ve been pleased to help them do that (and to charge reasonable fees for my help). But although minimizing estate taxes is important, it’s not the only reason you should do comprehensive estate planning, and for most of my clients, it’s not the most important reason they do it. (See more on some of the other reasons here and here.)

So, although my view on the matter places me in a distinct minority of trusts and estates lawyers, I wouldn’t be the least bit disappointed if we were to eliminate death taxes entirely. Besides the general “micro” unfairness to American families of re-taxing, at each generation, family wealth that has already been taxed when it was earned, federal and state death taxes are harmful on the “macro” level as well.

In a Wall Street Journal op-ed from October 2011, professor and author Steven Landsburg explains How the Death Tax Hurts The Poor by encouraging near-term spending rather than long-term investment:

We’re all living on other people’s inheritances and investments in our economy. Just five generations ago, the average American worked 60 hours a week, took no vacations, and earned less than the modern-day equivalent of $6,000 a year. He or she rarely traveled more than a few miles from home, had no central heat or running water, and died at age 50.

Today we earn more and work less because of better factories, more powerful machinery, and far more advanced technology. We work less around the house because of self-cleaning ovens and frost-free refrigerators and automatic washing machines. We travel far from home in our trains, planes and cars, or we access the world virtually without ever leaving our climate-controlled living rooms. We live longer because of better hospitals, better medicines, better research institutions, and better trained doctors.

Where did all that stuff—all those factories and computers and research towers—come from? It was constructed from resources and capital that became available to investors because somebody—perhaps some “rich” person—was being frugal. Often, that frugality was motivated by the desire to leave a bequest. Absent the death tax, we’d have had even more frugality and more resources available for the kind of investments that benefit all of us….

Check out the whole article, and keep in in mind as the next election approaches and the candidates start discussing their plans to reform the tax system. (If you like the article, you might also like Professor Landsburg’s book.)

How Low Interest Rates Can Cut Your Tax Bill

Alexander HamiltonI often point out tax-saving opportunities created by our current low interest rates, and an October 1, 2011 Wall Street Journal article does a nice job of making the point again. In How Low Rates Can Cut Your Tax Bill,  Tax Report columnist Laura Saunders points out that our current low interest rates (a Section 7520 rate of only 1.6% in December 2011) add to the attractiveness of several mainstream planning opportunities:

  • Loans to family members – the applicable federal rate for long-term loans (more than 9 years) is only 2.80% in December 2011. The author gives an example of a $100,000 loan from parents to a child and his spouse to buy a home: the parents could either collect annual interest of $2,950 or they could forgive the loan (up to $52,000 of debt forgiveness per year with no gift tax liability) in whole or in part.
  • Installment Sales — with interest rates low, more of a sale counts as capital gain than as ordinary interest income.
  • Grantor-Retained Annuity Trusts — noting that we have seen proposals from money-hungry Congressmen to eliminate short-term GRATs, the author urges consideration of a strategy “sanctioned by the tax code” while rates remain low;
  • Charitable Lead Trusts — Charitable lead trusts (in which a charity uses trust assets for a term of years to create income, and then returns them to your children or grandchildren) are likely to pass more tax-free assets to beneficiaries when interest rates and asset values are low. Given historically low interest rates and low asset values, lifetime CLTs, which can create income tax deductions now and save estate taxes later, are worth considering if you are charitably inclined.

Check out the article, and then contact me if you’d like to talk about any of these strategies in more detail. Remember, nobody knows how long interest rates will stay this low. They could rise tomorrow, so if you’ve been thinking along these lines, it’s time to get moving.

“How complicated can death taxes really be?”

IRS Estate Tax InstructionsThe IRS released on September 21 draft instructions for completing federal estate tax returns for persons dying in 2011. If you believe regular old Form 1040s have become overly complicated, just wait until you see these.