The estate tax, better known as “the inheritance tax” or “the death tax,” has become a major point of discussion over the last year and now looks like this could continue into 2012. Everyone knows the Bush-era tax cuts are expiring come the end of 2010, including the expiration of the estate-tax exemption escalations.
The law’s sunset provision starts January 1, 2011, and will force the estate-tax exemption back to $1 million, with a top estate-tax bracket of 55%, if Congress doesn’t intervene.
President Obama recently announced a legislated deal for a two-year extension on the Bush tax cuts, including an estate-tax exemption bump to $5 million and a top tax bracket of 35%. Of course, it still has to make it through Congress!
With all these issues at hand the past few months, articles have surfaced about billionaires who have died in 2010, resulting in our government’s tremendous loss of estate-tax revenue due to the non-existence of the estate tax this year. So it begs the question, “Is estate-tax revenue really that vital to our country’s coffers?”
Why Wouldn’t a Billionaire Have an Estate Plan?
According to a slide show on InvestmentNews.com, “What 5 billionaires would have owed,” it’s assumed that the estate taxes lost from the death of just these five billionaires in 2010 is roughly $8.7 billion. That would be staggering if it was even close to being correct. The article assumes a combined estimated net worth for these individuals of $19.4 billion, and further assumes that all of the money would be passed directly to heirs without any estate tax planning strategies in place, even if there was an estate tax in 2010.
My experience with clients’ estate planning objectives is usually to leave their estate beneficiaries in very good inheritance positions, while minimizing what the government gets; that being as close to zero as possible. Most estate planning strategies used for handling those objectives are largely charitable giving—whether through an outright charitable gift, the creation of a private family foundation or even charitable remainder trusts for estate beneficiaries. So it’s really absurd for us to assume that none of these options was in place for these billionaires, just because the estate tax was non-existent in 2010. The government wasn’t going to get $8.7 billion from these estates, because even the least bit of estate planning would drastically have reduced that number.
For example, based on the IRS Statistics of tax data for the year 2001 listed below, all gross estates over $20 million dollars effectively donated 23% of the gross estate values to some form of charity, directly reducing the gross estates’ values before calculating inheritance tax. Also, if you assume the five billionaires’ net worth is exactly $19.4 billion combined, which is more equivalent to a net taxable estate value instead of their gross estate value, the 23% would be a very low estimate.