| The
Estate-Gift Tax: Why Scrap It?
By
Martin M. Spencer
When
the estate tax was originally enacted early in the twentieth
century, it was often avoided through predeath transfers.
Persons with the necessary authorization could simply transfer
to intended beneficiaries all of the wealth of the individual
about to die. To thwart this tactic, statute drafters enacted
a coordinated estate-gift tax on testamentary transfers;
transfers at death were combined with a tax on inter vivos
transfers (gifts made while alive). Now, high-net-worth
taxpayers face an estate-gift tax levy on the combined base
of all their taxable gifts together with their net worth
at death.
The
Revenue Act of 2001, however, initiated a phase-out of this
estate-gift tax at death. If a taxpayer dies in the year
2004 with a net worth less than $1.5 million and no past
taxable gifts, an effective exemption of $1.5 million subtracts
from any estate-gift tax base of higher amounts. The 2001
act increases this effective exemption in future years.
An unlimited exemption is scheduled in 2010, but in 2011
it reverts to the pretax situation unless a new statute
is enacted.
Marriage
Complicated
marriage-related issues often arise in the administration
of the estate-gift tax. Under the spousal deduction, the
estate-gift tax does not apply if one partner in a married
couple dies. The government does not expropriate part of
that married net worth, waiting to collect the estate-gift
tax when the surviving partner dies. Continuous remarriages
to successive younger partners can postpone payment of the
estate gift tax indefinitely through successive spousal
deductions.
Taxpayers
can also avoid the estate-gift tax through a qualified terminable
interest property (QTIP) trust. Using a QTIP trust, a surviving
spouse becomes a lifetime beneficiary, drawing only income
while the principal eventually goes to other intended beneficiaries,
such as children by a former marriage.
Transfers
to Tax-Exempt Entities
Much
of the wealth of this country is owned by entities operated
to provide income for some public benefit (e.g. charitable,
educational, or religious entities). There is an unlimited
exclusion from the estate tax base for all transfers to
any of these entities. As a result, high-net-worth individuals
that want to keep their wealth under the control of family
or friends often transfer it all to a family foundation.
Ostensibly, the income (less fees and expenses) is spent
to benefit the public. In this context, capital gains, realized
or unrealized, are not income but additions to the entity’s
principal, adding to the wealth that designated successors
will be called upon to manage. Many high-net-worth individuals
make testamentary transfers to family foundations and also
inter vivos transfers, thereby reducing both income tax
while they are alive and estate tax when they die, all of
which cuts deeply into tax revenues.
Net
Result
Estate-gift
tax avoidance techniques are used on a large scale. The
results can be seen in tax revenue collection figures, approximately
$25 billion per year. Considering the gigantic aggregates
of wealth that pass at death, the estate-gift tax collected
is small, especially once the related costs of rule making,
administration, enforcement, and litigation are tallied.
Any reasonable estimate of related costs produces an inescapable
conclusion: The estate-gift tax collects next to nothing.
Some
commentators say that capitalism tends to develop a hereditary
plutocracy owning vast amounts of wealth and that government
has to expropriate part of that wealth as it passes to others
at and before death. But practical analysis shows that the
estate-gift tax is not the answer. It is rife with inequities,
problems, and loopholes that are readily available and widely
used, making the final financial result little more than
zero.
Martin
M. Spencer, PhD, CPA, practices accounting in Bayside,
N.Y. He is the author of When Property Pays Does the Owner
Deserve It?
|