Max Dispels Some Estate Tax Misconceptions

Damned succinctly. MaxSpeak (04.16.05):

"1. The event that triggers the tax is NOT death. 'Death tax' is a politically-interested misnomer. Most who die (98%) pay no such tax. The occasion for the tax is the transfer of a large amount of wealth. That's why it is called 'The Estate and Gift Tax.' 2. Those to whom the tax applies DO NOT give up half their estate. The average effective rate for the larger estates is under 20 percent. The marginal rate is around 50 percent. A few years ago, I had to try and explain the distinction to Bill O'Reilly on national television. 3. Estate taxation IS NOT double-taxation. Much of the income accumulated in estates has NEVER been taxed. This includes appreciation in the value of financial assets, unincorporated businesses, and farms held until death. 4. There is NO NEED for the recipient of a family business or farm to liquidate in order to pay tax. In today's world of marvelous financial intermediation, it is a trivial matter to securitize that portion of an illiquid firm required to pay the tax, which incidentally need not be paid all at once. " Eat the Rich

As to point 2, commentator Mellifluous sums up marginal vs. effective tax rates:

"Suppose you have a taxable amount of $1000, and the tax rate is 0% on the first $900 and 10% on the next $900. The marginal rate is 10% at your asset level, whereas the effective tax rate on your asset is $10 (the total amount of tax) divided by the total amount of the asset, or $10/$1000 = 1%."

As to point 3, not only is the appreciation in value of an asset never income-taxed to the decedent, those assets also receive a "stepped-up" basis upon death. The basis to the beneficiary is the value of the asset as of the date of death. Meaning all that capital gain is never income-taxed to anyone. Not to the decendent, not to the beneficiary, not to anyone. Long and short? If the estate is worth enough, there will be a tax. And only one tax. And that would be the estate tax. As to point 4, the tried and true mechanism to minimize, if not eliminate, the need to liquidate a business or a farm to pay estate tax is the irrevocable life insurance trust. Rich guys have been doing this for years for exactly this reason. The simple overview: upon death, the insurance company pays policy proceeds to the trust. The trust takes the cash and buys the farm or business from the estate. The estate pays the tax with the cash. Any excess cash is distributed to the beneficiaries. The trust is then dissolved, and the farm or business is also distributed to the beneficiaries. Slick, huh? Some background from the Federal Citizen Information Center, courtesy of the General Services Administration:

"To avoid inclusion in your estate, such trusts must be irrevocable - meaning that you cannot dissolve the trust or change the terms of the trust if you change your mind later. With proper planning, the proceeds from life insurance held by the trust may pass to trust beneficiaries without income or estate taxes. This gives them cash which may be used to help pay estate taxes or other expenses, such as debts or funeral costs." Planning Your Estate

If you want to wonk out, go here. Warning!! It is a little dated. Maximus doth speaketh the truth, and nothing but the truth. Putting it politely, any blowhard telling you anything differently is full of shit.