The Internal Revenue Service defines the estate tax, properly known as the estate tax, as a tax on your right to transfer property at the time of your death. You have the right to transfer assets to your loved ones, but the federal government asserts your right to tax your right. Here, two forehands make a mistake.
For the past 15 years, the amount of revenue generated from estate taxes has never exceeded 1.6% of all tax revenue collected by the Federal Government. Only 47,320 estate tax returns were filed in 2009. The IRS claims that, in its current form, the estate tax only affects the wealthiest 2 percent of all Americans.
Despite the limited number of Americans who are actually affected by the tax, many millions of Americans with substantial assets are legitimately concerned about the estate tax. Estate tax is incredibly complicated. It provokes fear of the future because it is unpredictable and arbitrary. An entire industry of lawyers, accountants, financial planners, banks, and insurance companies are highly paid to solve problems and address the fears this tax raises.
You must account for everything you own or have certain interests on the date of death. Property to be accounted for includes:
* cash
*values
* real estate
* life insurance benefits
* trusts
* annuities
* business interests
* cars
* jewels
* and any other assets you own at the date of your death.
The fair market value of these items is used. The total of all these items is your “gross estate.” Once you’ve accounted for gross estate, you’re allowed deductions to arrive at your “taxable estate.” These deductions can include mortgages and other debts, estate management expenses, property passing to surviving spouses, and qualified charities. After calculating the net amount, the lifetime value of taxable gifts (starting with gifts made in 1977) is added to this number and the tax is calculated. The tax is then reduced by the available unified credit.
This unified credit is the problem. How much? In the years 2004 and 2005 it was $1,500,000. In the years 2006, 2007 and 2008 it was $2,000,000. In 2009 it was $3,500,000. This year, 2010, there is no estate tax and is in effect replaced by a capital gains tax.
In 2011 taxable estates and life gifts in excess of $1,000,000 will be taxed. There are currently about 5 million Americans who have more than $1,000,000. Many more Americans who aspire to own more than $1,000,000 in assets must take estate tax into account.
The estate tax is not used to generate revenue, but is an instrument of public policy. America’s 5 million millionaires control more than 50% of all America’s wealth. Keep in mind that there are more than 330 million Americans who between them own the other half of America’s wealth. The wealth tax is an attempt to break down concentrations of wealth. The legacy of a billionaire provides a clear example.
Dan L. Duncan died in late March 2010 of a brain hemorrhage at age 77. Forbes magazine estimated his worth at $9 billion, ranking him the 74th richest in the world. Had his life ended three months earlier in 2009, his $9 billion would have been subject to federal tax of at least 45 percent. If he had lived beyond December 31, 2010, his $9 billion would have been subject to a 55 percent tax rate. Due to the time of his death, his children and grandchildren will receive $9 billion free of any estate taxes. Due to the timing of Mr. Duncan’s death, he avoided $4.5 billion in estate taxes.
If you are a California resident, you do not have to worry about California estate tax. Section 13301 of the Revenue and Taxation Code states categorically: “Neither the state nor any political subdivision of the state shall impose any gift, inheritance, estate, bequest, income or estate tax, or any other tax, gift or estate or the inheritance of any person or in or by reason of any transfer that occurs because of a death”.
The public policy against the concentration of wealth uses the wealth tax as a forceful instrument to prevent the concentration of wealth and it is not effective. However, the politics of Republicans and Democrats has become when one dies a tax planning strategy and tragedy. The legacy of the “inheritance tax” will live on.