Tuesday, June 10, 2008
A net to tax the gross
Using Paris Hilton is more aesthetic than logical. As far as I can tell, she has parlayed her wealth, looks and notoriety into substantially more wealth and notoriety. Clearly it offends people that she can make money for being a socialite, but she has been economically productive with her..er..assets. She isn't the poster child for unproductive born-on-third-basers. There are plenty of rich second and third generation types who do nothing at all to generate wealth. The thing is they sit on enough boards and belong to enough important social circles that nobody wants to make them the whipping boys for the estate tax.
My argument remains that the estate tax-avoidance techniques used by the mega-wealthy tend to lock up the fund much longer than just letting the kids have it. The kids tend to spend it, which is a nice quick re-allocation to the economically productive. The big endowments and trusts set up by the mega-rich just diminish slowly with "dutch uncle" trustees overseeing the heirs, who pontificate uselessly and are photographed for the society pages at charity functions well into their dotage.
The Estate Tax has proven itself counterproductive in the dubious stated aims of re-allocating assets to the economically productive or even achieving some kind of direct social justice.
7 Comments:
By 
GreenmanTim, at
Tue Jun 10, 09:10:00 PM:
I'm going to agree with Mindles here. The Estate Tax has historically been murder on family real estate. Saving the farm is particularly hard in times of elevated land values, and when the Estate Tax kicked in at $600K not so very long ago, keeping land like this intact was incredibly difficult. Placing permanent conservation easements on land to lower its value for estate tax purposes was often the only way that families could prevent having to chop it up to pay the taxes. This had a similar "tying up" effect to the Trust funds Mindles references in his post.
Under President Bush, the amount that triggers an estate tax filing has been progressively rising. If you die this year, up to $2 million in your estate is exempt from this tax. Next year it will be $3.5 million and in 2010 the sky is the limit. In 2011, however, the enabling legislation sunsets and the tax kicks in at Pre-Bush levels, along with a maximum tax of 55%: nearly ten points higher than today's rate.
As for whether chopping up family lands into smaller pieces in order to save the remainder is in the public interest (as opposed to any landowner's right by choice which is not in dispute), consider that in Massachusetts and Connecticut, the number of forest landowners doubled in the last decade but the amount of forest cover decreased. Fragmented landscapes and poorly managed natural resources are the result. We aren't reaggregating these smaller parcels into larger ones; not at these prices. There goes your rural character.
By randian, at
Wed Jun 11, 06:35:00 AM:
Family foundations tend to dissipate quickly once they get captured by professional leftists and run for the benefit of staff rather than for the benefit of the foundation's original clients. A few, like the Ford foundation, were so large that even capture by the staff didn't destroy them, though they did start tilting hard left.
By ScurvyOaks, at
Wed Jun 11, 10:42:00 AM:
Mindles,
You write: "My argument remains that the estate tax-avoidance techniques used by the mega-wealthy tend to lock up the fund much longer than just letting the kids have it. The kids tend to spend it, which is a nice quick re-allocation to the economically productive. The big endowments and trusts set up by the mega-rich just diminish slowly with "dutch uncle" trustees overseeing the heirs, who pontificate uselessly and are photographed for the society pages at charity functions well into their dotage."
Based on 21 years of experience as a tax lawyer (income not estate, but I've seen a lot of estate planning along the way), I disagree with your analysis. The aspects of estate plans that keep the kids from spending all the money are in place in order to keep the kids from spending all the money -- NOT in order to avoid estate tax. In many cases, because of the gruesomely complex generation-skipping tax rules, you either end up paying more tax or more attorney fees in order to tie up the money longer. So getting rid of the estate tax is very unlikely, in my judgment, to free up inherited money sooner.
Now to the extent that your argument is based on the fact that the estate tax includes a charitable deduction, I agree. A lot of money goes into foundations that might be redistributed more quickly if it went to the heirs. OTOH, the money in foundations isn't hid under mattresses. It's a significant source of investment capital, and has some economic utility in that respect.
By Georg Felis, at
Wed Jun 11, 11:32:00 AM:
Actually according to the Law of Unintended Consequences, a permanent removal of the Estate Tax will have the result of many wealthy people being less paranoid with their estate control (since it is less complicated), and therefore less money spent on tax/estate attorneys, therefore more unemployment in the money-smart lawyer demographic, which will naturally cause more of them to run for elected office, resulting in more rational tax laws.
Tigerhawk 2012!
By Andrew Hofer, at
Wed Jun 11, 12:26:00 PM:
Scurvy I find your point of view surprising (and I'm speaking from familiarity with the plans of many families with more than $25 million).
Most estate planning techniques come down to 1) giving up as much control as is necessary to effectively transfer wealth 2) giving up enough control to create discounts in valuation 3) using present value techniques to maximize present income and estate tax value of a charitable gift.
In the first category I'd place life insurance trusts, generation-skipping trusts and GRITs and GRATs. In the second I'd place family limited partnerships and land and property trusts and the last, of course, charitable remainders and foundation creation.
All of these, plus some of the family trust techniques that no longer work (but worked well for Rockefellers and Kennedys) create a situation where a gatekeeper (Trustee or Officer) prevents any substantial change to the disposition of the assets.
I know many rich people like 'hand from the grave' control, as you suggest (particularly in private company succession situations), but I think that is an added appeal on top of the well-oiled estate tax avoidance techniques.
I call your authoritah and raise you 10!
By Andrew Hofer, at
Thu Jun 12, 05:50:00 AM:
PS -your example of a generation-skipping trust is telling. Why design a GST if not to avoid the estate tax? The whole point is to get the money through two generations with minimum tax? Generation-skipping functionality is hardly necessary to retain control.
By Georg Felis, at
Thu Jun 12, 10:35:00 AM:
Oh, and MHD for VP :)
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