Looking Through the Political Smokescreen
If President, Donald J. Trump, had passed away prior to the adoption of the Tax Cuts and Jobs act with an estimated net worth of $3.1 billion dollars, upon leaving those assets to his children his estate could have been hit with a Federal Estate Tax bill of approximately $1 billion dollars. Trump being a New York resident tacks on almost $500 million more in New York Estate Taxes. Ouch!! However, that’s not so bad when you consider what the estate tax bill would have been back when the President’s father, Fred, died in 1999. Under the tax laws back then, an estate similar to Donald Trump’s would have triggered total estate taxes of approximately $1.7 billion.
Compare this to the estate of a wealthy political donor and casino owner like 85 year old Sheldon Adelson who reportedly donated an estimated $112 million dollars during the 2018 mid-term elections. With an estimated net worth of $33.7 billion dollars, even with the doubling of the Federal Estate Tax exemption in 2018 and no state estate tax (Sheldon and his wife live in Nevada), Adelson’s estate could be on the hook for approximately $13 billion in estate tax.
Is Death Tax Unfair?
At campaign rallies across the United States, politicians that are primarily Republican and some Democrat, decry the onerous “Death Tax” as an unfair and crippling attack on modest family farmers and middle-class small businesses. This rhetoric has been met with resounding applause from indoctrinated blue-collar Americans who bristle at the thought of a “Death Tax” it just sounds fundamentally wrong. Although the Federal Estate Tax exemption available to U.S. citizens and permanent residents has been increased by more than 1000% in the last 18 years, Senate Republican leaders have just recently renewed their push for an outright repeal of the Estate Tax. After all, the idea of spending your life building up a small business, a dairy farm, or some income producing real estate, with the hope of passing those assets down to your children and descendants is a big part of the American dream, isn’t it?
Well, it certainly doesn’t sound fair if a hard working farmer labors his whole life creating a successful family farm, and immediately following the farmer’s death his family would have to sell off everything in order to pay burdensome taxes on assets which have already been subjected to income tax. That image alone is enough to make you want to write a stern letter to your congresswoman and then join a sit-in on the steps of the U.S. Capitol building! Grab your picket signs, we must protect these ordinary hard-working Americans from the abominable Death Tax!!! But is this picture of the estate tax accurate, or a convenient illusion?
Senator Bernie Sanders Proposal
On the other side of the political aisle, Democratic leaders like Senator Bernie Sanders (VT) have recently introduced a proposal to reduce the available Federal Estate Tax exemption to $3.5 million dollars, and progressively increase the marginal rates on the largest estates reaching a maximum rate of 77% on estate assets exceeding $1 billion dollars. Under Sanders’ proposal, the estate tax bill for billionaire and Amazon founder, Jeff Bezos, with an estimated net worth of approximately $150 billion dollars, could potentially increase from $53 billion to $101 billion. But more importantly, reducing the Federal exemption to $3.5 million per taxpayer will make many more modest estates taxable, including some of these small business owners and family farmers that we are talking about.
This isn’t intended to be a political opinion piece, just an examination of facts surrounding the Federal Estate Tax and the sometimes-inaccurate public perception of this tax. So, let’s take a look at the numbers. Under the Tax Cuts and Jobs Act of 2017, the Federal Estate Tax exemption for U.S. citizens and permanent residents for 2019 is $11.4 million dollars. This means that a married couple can leave a total estate worth $22.8 million dollars to their children, grandchildren or any other beneficiaries they choose and pay zero in Federal Estate Taxes. With help from a qualified estate planning attorney, they can often leave behind far more than that without paying any of these taxes. In addition, sophisticated estate plans are typically structured in a way that avoids future estate tax on these inherited assets and all future appreciation on those assets in the estates of the taxpayer’s descendants.
USDA Release 2016
In 2016, the USDA released statistics which showed that 99.6% of the estates of U.S. farmers did not owe any Federal Estate Tax whatsoever. Additionally, this number is now even smaller following the more than doubling of the Federal exemption since 2016. For those few of the wealthiest most successful family farmers and small business owners that do have estates that will owe estate taxes, the government allows those taxes to be paid out over 14 years at relatively low interest rates. So, the idea of having to sell the family farm or business in a fire-sale following death is rarely the case.
Tax Policy Center in Washington D.C. Says
According to the non-partisan Tax Policy Center in Washington D.C., 2.7 million people were projected to die in the year 2018. Of those 2.7 million decedents, only about 4,000 of them would be required to file a Federal Estate Tax Return. Of those 4,000 tax returns, only 1,900 of them would end up owing any Federal Estate Tax whatsoever. This literally translates to only 1/10th of the top 1% of estates owing estate tax. Does this sound like millions of hard-working small business owners and farmers, or are we really talking about a smaller more exclusive group?
Who are the Federal Estate Tax Payers?
So, who are these taxpayers that pay Federal Estate Tax? Well, obviously the top .01% are seriously impacted, which might explain many billionaires’ generous financial support of politicians who favor outright repeal of the Federal Estate Tax. The original U.S. Estate Tax was signed into law in 1797 by President John Adams, based on the public policy that unlimited wealth should not be allowed to accumulate and concentrate in the hands of a few, to the detriment of the many, and also to fund the creation of the U.S. Navy. For better or worse, estate taxation was a concept embraced by many of the founding fathers. Benjamin Franklin proposed that the first Pennsylvania constitution should include a provision which declared concentrated wealth to be “a danger to the happiness of mankind.” Thomas Jefferson was a major proponent of significant estate taxation as well.
How I deal with the Federal Estate Tax?
As a Trusts and Estates attorney, I deal with the Federal Estate Tax every day. I practice in New York City and Long Island, an area of the United States that has one of the highest concentrations of wealth on the planet. So, of course my practice serves a disproportionately large number of high net worth clients who are seriously affected by these taxes. For them, we creatively plan within the parameters of the tax code, and are able to implement many strategies to leverage use of their tax exemptions and reduce these taxes and impact on their estates. Sheldon… Donald… Bezos… give me a call!!
Do I have many clients who are entrepreneurial small business owners? Yes! Are my clients often average upper-middle class families that own a nice home, a nice car, and are working hard to save for retirement and to put their children through college? Absolutely! Should most of these hard-working taxpayers lie awake at night in 2019 worrying about the Federal Estate Tax? That’s a hard no! Regular working families are rightly concerned with other important estate planning objectives; like protecting their children’s inheritance from creditors and ex-spouses, naming proper guardians for their minor children, planning to protect their hard-earned nest egg from the cost of a final illness and the costs of nursing home care. The Federal Estate tax right now is an issue for the .1 percent, and this clearly includes the conspicuous political donor class.
I am not advocating for estate taxes. The argument that the assets subject to the Federal Estate Tax are post-tax dollars, and thus the estate tax amounts to double-taxation is indeed a valid one. You could also certainly argue that the estate tax now affects so few taxpayers and generates such a small percentage of Federal revenue, that it is no longer worth the IRS’ cost to monitor and enforce it. But manipulating the public into the idea that in its current state, the Federal Estate Tax is regularly killing small business and the family farm? Well… that rhetoric might be more useful in fertilizing the fields.