The individuals who dislike the estate tax are voicing their opinions that the estate tax should be eliminated. Here is a link to an opinion in the Wall Street last week – It is frequently stated that income has been subject to double taxation, if the wealthy are subject to an estate tax. This may be true for some income. However, other income may never have been taxed. For example, like-kind exchange rules may postpone income recognition forever when similar properties are exchanged. Also when one corporation exchanges its shares of stock for the shares of another company this may be tax-free. I wonder how much of the wealth in this country comes from this freebie. Individuals may have been able to defer taxation on built-in gains on the sale of personal residences to some extent for decades. Oh and fringe benefits, that health care insurance that companies provide to some workers; the ones who are not part-time and who make enough money – that is income that has been given a free ride. All of these are tax favored transactions that could be taxed. I could think of more but you probably get the point. What about the income that is under-taxed with capital gains rates? Sometimes this lowered rate is on property that has not been held very long or on compensation that gets the reduced rate based on dubious legal reasoning.

Other property may not have been in a ‘transaction’ but the appreciation in value has not been the result of work on part of the owner. Raw land, fine art, collectibles may increase in value over time without any effort by the owner. The increase in value is passive and not earned income. Al Capone did he have earned income or was it ill-gotten gain? Some folks would argue that there has been a whole lot of ill-gotten gain in recent years that should go back to the common good by way of an estate tax. I have not touched upon numerous other tax provisions such as the oil and gas depletion allowance, provisions that relate to farming, stock options, etc. Some people are born rich by way of trust funds set up by prior generations; this also is not earned income. There are probably individuals in Congress, who would like to set up generation skipping trusts for their own families during any time break in the current estate tax provisions. Also the wealthy elites who control Congress are probably holding their breath in hopes of avoiding the generation skipping tax. Much of the wealth in this country results from income tax favored transactions or from income that was ‘NOT EARNED.’

There may no estate tax for the start of next year and possibly longer. If Congress passes a bill this year, that would make the situation clearer and perhaps eliminate some acrimony next year. If Congress does not pass a permanent or temporary extension of the Estate Tax, then it should reduce the exclusion for inheritances, bequests and devices. Internal Revenue Code Section 102 provides for an income exclusion on all inherited property, bequests, gifts and devices. The gift tax was retained for 2010 in the tax law changes back in 2001. Do you think some people have been waiting for this for a long time? You can find Internal Revenue Code Sections here. A reduction such as allowing only an exclusion of $250,000 per heir/beneficiary/devisee seems appropriate. Given the length of time it has taken to develop legislation this year and the apparent need for 60 votes in the Senate, it would be wise to act before year end. If inheritances are made mostly taxable, beneficiaries may be the ones desiring to purchase life insurance on their wealthy relatives. If one thinks about the estate and gift tax laws that have been in place for much of the last century, one may come to see that they make sense; just like the banking laws that were in place for much of the last century. Here is a link to history of the tax – A reduced inheritance/bequest/devise exclusion provision should be enacted if the estate tax is eliminated even for a temporary period of time. Much of the inherited property will not have been earned and there is no reason to give beneficiaries a massive break on their income tax bill – they certainly did not earn it.

Getting back to the generation skipping tax, there is an exemption of $3,500,000 for individuals and $7,000,000 for married couples in 2009. In 2010, the exemption becomes unlimited. CAN YOU SAY BILLION DOLLAR TAX BREAK FOR THE WEALTHY ELITE? One can find discussion of generation skipping tax changes in some of recent editions of tax journals – the authors there probably want to advice the wealthy. The ability to set up generation skipping trusts may cost the U.S. Treasury more than the section 102 exclusions for inherited property. Is it not great that while Congress dithers over health care legislation it is also in its own sneaky way providing for the wealthy? We have the best Congress money can buy. If Congress does not pass permanent or temporary estate tax legislation this year, they should close down the possibly of generation skipping trust windfalls for the wealthy. Reducing the section 102 exclusions would be one way to do this. If anyone has other ideas for closing down the generation skipping trust windfalls, please provide a comment.

While writing this paper, I see that there is an article in the Wall Street Journal, indicating that Representative Pomeroy has given up hope of having a permanent or temporary extension of the estate tax. A capital gains tax is acceptable when the property is ultimately sold. Given, this Congress I suspect they will try to lower the capital gains rate, though. But this does allow an estate to escape estate taxation for those who die in 2010. This will be a massive tax break for some families. Also, apparently generation skipping trusts will be able to have an unlimited exemption which will postpone the tax bill for many of most wealthy for decades if not forever. A reduction in the section 102 exclusions could easily be put into some bill before the year-end and would reduce the huge tax windfall that is about to happen. If Congress wishes to replace the estate tax with the income tax, it does not have to provide massive tax breaks for the wealthy to do so. Replacing one tax with another tax is not a tax increase it is replacing one source of revenue with another.



Damagedone has taught at several Universities in Schools of Business Administration.