This is the year when the heirs of the super rich bought sky-diving lessons for dad, fed him prime rib twice a day and told him, “what the heck, a third martini can’t hurt. You only live once.”
Because Congress didn’t ever get around to passing a sensible estate tax law, the old one expired and a new one isn’t due to take over until January of next year.
It is, in short, a good year to die — from an inheritor’s point of view.
Or is it?
Under the old law, the value of inherited assets became the market price at the time of death of the previous owner. That is, a share of stock purchased years ago at $10, then increased in value over the years to $100, was “stepped-up” in value to $100. If sold at that price, there would be no capital gains and, therefore, no tax would be due on assets under the exempt amount.
When that law expired, the step-up provision went away and capital gains — the difference between purchase price and sale price — became taxable on all inherited assets when sold.
Without the step-up provision in the former law, heirs of the rich may find that they owe far more in capital gains taxes than they would have been required to pay in estate taxes. The assets in the estates of the super rich who have died since Jan. 1 of this year have been affected by this very significant change.
Wait, there’s more.
Under the estate tax law in force last year, estates below $3.5 million — or $7 million for a couple — were exempt. In 2008, the last year for which numbers were available, only 17,172 taxable estate tax returns were filed. Fewer than 1 percent of us were going to be affected by the estate tax that Congress couldn’t summon up the gumption to extend.
All of that silly rhetoric about “the death tax” had its effect.
So the tax died and what we have in its place is the prospect of many thousands of heirs who would have owed nothing under the old law faced with substantial capital gains taxes on the assets they inherit.
Current tax law allows an executor to assign a “step-up” basis to $1.3 million of the assets in an estate — meaning that $2.2 million in assets that would have been exempt under the old law might now create taxable capital gains.
THERE ARE other complications which make the lack of a rational estate tax a curse rather than a blessing. An executor may chose which heir receives part or all of the $1.3 million in stepped-up value, and which does not. Two heirs could receive assets of the same nominal value but face different tax consequences — which would make the bequests unequal.
Ask your accountant to explain the other ramifications to you. Ask your congressperson and your U.S. senators to pass a new estate tax law before the year ends.
A new estate tax with a reasonable exemption is needed because some estates in this very rich land of ours are enormous and should be taxed. Even though 99 percent of the nation’s families were not affected by the law that expired, the 1 percent that were contributed about $22.5 billion to the U.S. treasury in 2008, or about $75 for every man, woman and child in the country. Put it another way: to make up for the lack of an estate tax, every American would have to pay $75 more each year.
In addition to the fact that Uncle Sam needs the money, there is an even better social and political reason to tax very large estates and that is to at least moderate the growth of a class of very, very rich individuals and families which could evolve into the kind of aristocracy our ancestors left Europe to escape.
When individuals can earn and keep more than a billion dollars a year — which a growing number of our super rich do — the development of a ruling class not only becomes possible but inevitable unless tax policies are adopted to prevent it. Money equals political power in our society. Huge amounts of money could generate vast political power which could change the nature of our democracy.
Ånd that, gentle reader, is the most compelling reason to enact a reasonable estate tax law and why income taxes on individuals and corporations should be designed to prevent concentrations of wealth so vast that the very nature of our representative democracy comes under threat.
— Emerson Lynn, jr.
