If a wealthy individual were to pass away, they would need to pay the estate tax, also referred to as the “death tax.” Previously in 2010, the estate tax plan was repealed. One year later, it was brought back to repair the damage caused by the decrease in federal revenue.
Estate Tax Repeal Causes Congress to Lose Out on Billions
Towards the middle of 2010 through the end of 2011, when someone wealthy died, they were able to ignore the estate tax, because it wasn’t mandatory. Dan L. Duncan, a gas-pipeline tycoon who Forbes pegged as the 74th richest man in the world, passed away from a brain hemorrhage in 2010. His estate cost around $9 billion, and if he had passed about three months earlier, he would have been stuck with a tax bill totaling almost $4 billion. This gave him the title of the first billionaire in America to die without being subject to an estate tax in nearly 100 years.
While this was good news for Duncan, it was very bad news for the United States. By not placing a tax on Duncan’s estate, the federal government lost billions of dollars. This occurred because Congress couldn’t come to a decision on a new estate tax. Congress didn’t expect Duncan to have no estate protection, which only caused America to miss out on the opportunity to gain additional money, making it Congress’s fault for not planning ahead. In fact, the Congressional Joint Committee on Taxation estimated that restoring the estate tax at 2009 levels would have added almost $468 million to the federal government’s 2010 revenue prior to this event.
The Importance of Maintaining an Estate Tax
The purpose of the estate tax is to increase the federal revenue. With an increase in federal revenue, other taxes don’t need to be as high while still giving us access to essentials like roads, courts, science, inspectors, food safety, benefits for retirement, national defense, etc. Rich or not, everyone pays taxes, it makes sense that the rich pay these estate taxes because of the large amount of money that they have due to their estates.
About two out of every 1,000 people who die actually owe estate tax. This is due to the $4.84 million increase in the exemption amount from $650,000 in 2001. Estates were being taxed 40% and had an exemption of about $5.49 million per person, or around $11 million per couple. According to Internal Revenue Service data, in 2013, the Urban-Brookings Tax Policy Center calculated that the average size of estates paying the tax that year was $22.7 million, and that they paid a rate of 16.6%. Of all the estates, only a portion of people have to pay. As stated by the Joint Committee on Taxation, 99.8 percent of estates owe no estate tax at all today. In 2015, 11,917 estates were filed out with the I.R.S. Form 706, but only 4,918 of those people owed tax. All together, these people paid close to $17.1 billion.
As President Trump ran for presidency, one of the key points he sold for votes was that he would repeal the estate tax again so people are not forced to give away their money. Where this would be beneficial to the rich, a disadvantage of this tax plan’s estate tax removal is the burden it imposes on other citizens, their businesses and family farms. Without an estate tax to generate revenue, the government will have to tax others, adversely affecting the rest of the population. Nevertheless, the fraction of individuals subject to the estate tax are vocal advocates for its repeal. From their perspective, they make this money due to their immense amount of hard work and the government is taking millions, even billions away from their household. For the most part, the wealthy are financially stable enough to give away a portion of their wealth and still have more than enough for themselves and their families, but their interests and influence play a considerable role in such deliberations.
There are many advantages of the estate tax which may prohibit any further repeals of this law. Roughly 2.7 million Americans die each year, and only 11,310 of those people are expected to pay an estate tax. Only 0.2% of all estates in the US actually qualify for the estate tax. The number of people paying this tax is minuscule compared to the amount of people who die annually. With that being said, despite the tax plan’s passing, it is highly unlikely that the government would retract this law forever, because it would lose bounteous amounts of revenue. This money is used for necessities that we, humans, use on a daily basis.
Mitigating the Estate Tax
There is no real way to get rid of an estate tax, and if you have an abundant amount of estate worth, you will be required to pay a tax. However, this tax can be deducted. For example, if an individual who was very wealthy were to donate his or her money to charitable trusts, it would lower the hardships of the estate tax. Through CLT’s, charitable lead trusts, a person can ensure that some of their assets will be given to a tax-exempt charity. There are many options on how to avoid or mitigate the estate tax, but the best option would be to contact our law office for estate planning advice.