Sunday, July 30, 2006

TAX THE RICH - Repeal the Estate and Gift Tax

Looking out for Paris Hilton's trust fund? Hardly. The current tax law created the situation where wealthy families have little control over trust have control means that ownership has not truly passed to the beneficiary and can be included in the gross estate of the decedent. Thus, the wealthy Hiltons who created the Hilton trusts were required to leave vast sums to all future Hiltons (perhaps even before Paris was born) in order to avoid the estate and gift tax.

The estate and gift tax is a trap for the unwary. I talked with Bob Shamansky, Democrat candidate in the 12th Congressional District of Ohio, and he joked that he had never seen the "mythical family farmer" who would lose his farm because of the estate and gift tax. That was very ironic...hearing a wealthy businessman (who probably has a very sophisticated estate plan) say that the estate and gift tax really wasn't hurting anyone.

The mega wealthy families (like the Hiltons) can afford to spend millions of dollars in attorney fees and accountant fees in order to structure elaborate tax avoidance plans that reduce the tax bill. However, owners of successful businesses may not realize that their net worth has gone over the threshold for taxation and, on the death of the owner, find themselves stuck with a massive tax bill. It is not the family farmers that I am worried about; it is these businesses.

Dems are demagoguing the hell out of this issue...but the current tax law was written BY very wealthy Dems in the 1950s with an eye towards protecting their estates. Billionaires today are frantic in their efforts to preserve the current tax structure...they have invested millions of dollars in their tax avoidance that would be wasted if the estate and gift tax is permanently repealed - especially since the property that was potentially subject to the estate and gift tax would be more likely to be taxed as income.

When an heir receives property from the estate of a family member, that heir can immediately sell that property without getting stuck with a bill for income taxes. How? Let's look at how you compute income from the sale of property. "Income" is determined by taking the amount of money you receive when you sell a thing (the "amount realized"), and subtracting the amount that you paid when you first acquired it (the "tax basis"). So, if you bought a Rolex watch several years ago for $3,000 and sold it this year for $4,500, you would realize $1,500 in income.

What happens if you don't know (or can't prove) what you paid for a thing? Well, then the entire amount received is counted as income. But, there is a special rule that applies for property that you receive from a decedent's estate. THAT property is given a special tax look at the fair market value (the amount that you probably could have sold the thing for) on the date of the decedent's death and THAT will be the tax basis from that day forward. So, if you receive Uncle Seymour's prized Rolex watch from his estate, which he paid $1,500 for and which was worth $4,500 on the date of his death, and sold it for $4,500, you would have $0 income from that sale...and no income tax payable.

Guess what? The repeal of the estate and gift tax also means the repeal of the "stepup in basis" on the decedent's death. So, what is really happening is not the repeal of a tax so much as trading of one tax for another. And the billionaires are worried. It is likely that many of their estate plans take full advantage of the stepup in advantage that will be lost. Hence, their eagerness to keep the current tax structure is NOT based on their civic mindedness and willingness to pay tax...just the opposite! It is based on their desire to keep from paying taxes at all.

So, sock it to the rich! Repeal the DEATH TAX!


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