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Thank you “Ronald Greenberg from Glen Rock, New Jersey “ and “Rick from Manhattan“ for your clear explanation of the situation. Brian needs to redo this segment with you and others who have a better understating of the issue and can provide clear explanations.
I would like those who find the estate tax unfair to comment on the fairness of not having heirs pay debts and other liabilities in excess of the value of an estate. In other words, if someone dies with $100 and owes creditors another $1000, the heirs are not responsible for the $900 deficiency.
The central concept in estate taxation is, BASIS. Yet this word was not even uttered by any of those who offered their "expertise" during this segment. A few commenters, however, have alluded to it.
BASIS is the cost of an asset (stocks, bonds, real estate, businesses, artwork, etc.) that is used to determine the gain (or loss) upon its disposal. This gain is taxed; it is called the capital gains tax.
How does this apply to estates? Upon death, the bases of any assets in the estate are adjusted to the CURRENT MARKET VALUE. That means that the possibility of EVER levying capital gains tax on any of the unrealized gain in an estate disappears! Neither the decedent, the estate, nor any beneficiaries are EVER taxed on the gain that is unrealized at the date of death. This is a tremendous gift of the United States to its wealthiest families; it is a gift that keeps on giving to estate beneficiaries, and it is the main feature of present and past estate taxation schemes.
The estate tax is designed partially to pay for this gift. Eliminating the estate tax while retaining the basis adjustment feature is a "get out of fair taxation free" card that is a top priority of the Republican party. One of your commenters, who at least understands the situation, explicitly assumes that the elimination of basis adjustment would be part of an estate tax elimination deal. But it won't be if the people don't assert their interests in the matter. Unfortunately, your program segment on the issue did nothing to clarify these issues and a lot to muddy the waters.
The callers confused the issue more than shedding light. The estate tax is a percentage of the value of a decedent's property paid by the estate, although, clearly, it reduces what the heirs receive. The heirs do not generally pay income tax on what they receive from an estate, and property that may have been appreciated in the decedent's hands receives a new, fair market value, basis, so there is no capital gains unless the property appreciates more in the heirs' hands. An exception to the income tax rule mentioned above relates to income earned by the decedent, but not taxed to the decedent, such as pre-tax IRAs or unpaid salary, on which the estate or an heir may have to also pay income tax.
The estate tax has two significant justifications. Remember that it was meant to hit only the super rich when it was first put in place. Politically, it was intended to prevent the US from becoming like European countries in which wealthy aristocracies were perceived as having too much power. The tax also has a macroeconomic justification. The wealthy tend to spend less of their income on consumption than the less wealthy. Large accumulations of wealth over the years can reduce employment by reducing aggregate demand. The estate tax redresses this impact by providing a source of tax revenues that can be used to reduce taxes on other elements of society and increase aggregate demand.
I think that everyone is missing the point. We aren't really taxed on our income, transactions are taxed. When the money passes from our employer to us, we are taxed, when a certain amount of money goes from us to someone else it is taxed. When the funds move from the estate of the departed person to someone else, it has to be taxed. Simple.
None of your callers fully & correctly answered your question about estate vs. income taxation.
If A bought stock for $100, then dies when the stock is worth $200, the estate pays tax on the $200 (as part of the entire estate, if the estate exceeds the $3.5M threshold). Then say the stock passes to heir B, who later sells it for $250. Then B pays capital gains tax on only the $50 increase from $200 to $250. So there is *no* double taxation on the appreciation from $100 to $200.
And if the estate tax is fully abolished, then B would (presumably) have to pay full capital gains tax on the appreciation from $100 to $250.
I hope this clarifies.
Brian, you and your guests left out a very important consideration. In a capitalist, work-oriented society, it is not in society's interest to concentrate increasing amounts of wealth in the inheritance of a small, elite upper class of trust-fund dependents. Some degree of estate tax is worthwhile to avoid this. Also, if one looks historically, this concentration of wealth in a very small percentage at the top was one of the conditions that contributed to the Great Depression. An estate tax is far more progressive than concentrating taxes on the middle class.
Thank you, Dave. I'm really confused now. We need a planner who can speak with clarity.
Yes, but we CHOOSE to shop, we DON"T CHOOSE to die.
There is a major point not made -- stepped up basis. Stock with a low basis (appreciated) gets a stepped up basis. The heir takes it at the fair market value at the time of death. If it is the sold no one ever pays tax on the gain.
I am a tax lawyer.
A estate tax is a very good way of of leveling the playing field. It is the only way to counter the huge concentration of wealth that will destroy this system.
What is he saying? These people wouldn't have been paying income tax on earnings and dividends? They don't have to file taxes in their lifetime?
This segment is going off the rails. Try to get a Certified Financial Planner on the air to explain this.
Brian, every time you use the term "death tax" Frank Luntz gets closer to getting his wings.
But the person who inherits is typically also the estate! They are one in the same. (Since the estate holder is NOW DEAD!)
This guy on the phone right now is paranoid and talking out of his ...!
The tax lawyer on the line was wrong. The 1,000,000 left under the pillow may be taxed as part of the estate. It is NOT taxed to the recipient as income.
I disagree with these taxes. I don't think anyone who inherits an estate should be taxed for that reason. Once they receive the estate and begin to take income from it then they should be taxed on that income. This 45% tax on this inherited estate sounds like a mafia-like deal. FORTY FIVE PERCENT!!! That's robbery.
what about retro-actively taxing people in the future? I heard someone in congress will tax these people next year or something like that
Didn't the "rich" typically EARN that money over their lifetime and save it and, therefore, their family should be entitled to receive their family money without a large tax penalty?
and the rich get richer!
Didn't the person who left the estate behind already pay taxes on their earnings/profits during their lifetime and isn't it then "double dipping" by the government?
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