Can I just start with a complete non-sequitur? I'm a marketing major. For a time it was what I did for a living. I see a lot of ads on the "prestigious Internet", and for the life of me I do not understand what fly-covered dachshund-pigs, gingerbread men stuck in vials of frosting, elongated deer, or snow-covered maps of the Unites States have to do with the mortgage business. I just...I just DON'T get it! Maybe someone can help me out here. I'm losing sleep over this!
But I digress. During the absurd (and now largely dead) Social Security debate, a common refrain from Republicans was that we had to do something drastic. Minor corrections wouldn't save the system! It had to be completely overhauled. Much to their dismay report after report showed how a few minor changes could shore up the system for the next 150 years or so. Accursed reality again getting in the way of good conservative doctrine!
The Social Security debate reminded me of another debate when us "good guys" were less successful. The Estate and Gift Tax code revisions that resulted from the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. Or as Frank Luntz put it--the death of the Death Tax.
Part of what I do for a living is to advise people on properly planning their estate. The law is complicated, circuitous, and full of loopholes. There are two reasons why it makes no sense for conservatives to get all bent out of shape when it comes to the Estate Tax. First, it violates a belief in personal responsibility. Second, and more importantly, it's an optional tax. You only have to pay it if you fail to plan.
Just to give you a little history on the issue, the Estate and Gift Tax system has been basically the same from 1977 to 2001. If you left everything to your spouse, you paid no estate taxes. That's called the "Unlimited Marital Deduction." The Estate Tax only comes into play when both spouses die, and money and property are left to other family members. Even then there was an exemption amount under which you didn't owe any taxes, and that exempted amount was gradually increasing from year to year.
So let's say it's 1999, and mom and dad have snuffed it. They leave everything they own to their kids. You add everything up and mom and dad were worth $675,000 each. The total estate is worth $1,350,000. Congratulations! Your federal estate tax liability is ZERO! You only have federal estate tax liability on the amount over $675,000 per person. So if mom and dad had a combined total estate of $1,350,001, then you'd owe about forty-seven cents in federal estate taxes.
So that seems like a pretty good deal, except for one particular problem--the family farmer. Like the `fiscal conservative,' the family farmer is quickly disappearing. According to Farm Aid, there are 5 million fewer farms today than there were in 1930. Of the 2 million farms that remain, only 565,000 are `family operations.' Half of all farmers today are between the ages of 45 and 65, and fewer than 6% are under the age of 35. They are literally a dying breed.
The Estate Tax most certainly did contribute to this decline in the number of family farmers. Estates used to be valued on what is called a `best use' basis. Here in Memphis we had a plot of land called Schilling Farms. It used to be an actual farm, and it used to be out in the country. But then the suburbs invaded, and suddenly Schilling Farms was right in the middle of some of the most valuable real estate in Memphis.
So let's say the Schilling's die and leave the family farm to their 3 kids, who really did want to continue the family tradition of farming. (We are purely engaging in a hypothetical exercise here...the Schilling family is well-to-do and makes lots of money NOT farming, so you don't have to feel sorry for them.) The farm generates about $100,000 in net income per year, so each kid would make about $33,000 a year. They won't get rich, but they won't starve either. If you assume that a business is worth (at most) ten times what it earns, then the farm operation would be worth about a million bucks. The Schilling kids should be well below the federal estate tax credit of $1,350,000.
Not so fast! The IRS comes along and says "Hey, this land is right in the middle of a bunch of million-dollar homes! If you guys would quit farming and sell this land for subdivision, it'd be worth $10,000,000. Since you could do that, we're going to assume that you will do that once we leave. Therefore we will assume your family farm is worth $10,000,000 since that's the value of its best use. Please write us a check today for $4,750,000 to pay your family's estate tax liability or we'll seize your family assets!"
Since most family farmers don't have four million bucks lying around in a mattress somewhere, a lot of them went under because of this stupid and arbitrary rule. Eventually (after WAY too long) someone figured out how bad this law was and changed the code to allow for estate valuation based on the `Current Use' of the property (IRC Sec. 2032A, if'n you're interested), and not just the best use anyone could think of at the time. It was a good change to the law. It wasn't perfect. It could have been more, and it should have happened sooner, but to a large extent it solved the problem. Furthermore, the law could have easily been tweaked to solve the problem for those still affected by it.
The bottom line is you don't have to `blow up' the IRC to fix this problem! With a little bit of planning, the family farm (or any estate for that matter) can pass from generation to generation with little to no difficulty. And therein lies the problem. A certain amount of planning is required. You have to take personal responsibility for your legacy.
You think that would be enough for conservatives. The Estate and Gift Tax rules are sort of the Federal government's way of saying, "Either you create a legacy with your wealth, or we will create one for you." And here's the real kicker--There's no reason why anyone should have to pay the tax. It's completely avoidable if you're willing to do what it takes to get around it.
Let me give you an example. Let's say you're $100,000 over the limit, and you want to avoid the estate tax altogether. You take that hundred grand and you move it into a charitable trust--say the American Heart Association. Here's the deal. When you die, the American Heart Association gets the hundred grand, but while you're alive you can live off the interest generated by that money. With the interest generated by that hundred grand, the American Heart Association buys a $100,000 life insurance policy on your life with your family as the named beneficiary. So when you die, the charity gets your $100,000, your family gets the $100,000 from the life insurance policy (since you didn't own it, it's not included in your estate), and the federal government gets nothing! Here's the drawback--once you give that $100,000 to the charitable trust, you don't ever get it back. You've given it away.
For most of us, that's asking a lot. But for those susceptible to the federal estate tax law it's a drop in the bucket! That very scenario I've detailed above had been done countless times by countless billionaires over the years. They've elected to make permanent changes to their estate plan in the hopes of avoiding the estate tax.
That's the reason why so many billionaires were opposed to overhauling the estate tax system. Remember that? When Bill Gates and Warren Buffet (among others) came out opposing the abolition of the estate tax, people fawned over how they were putting the public's benefit ahead of their family's estate. I call B.S. Likely the opposition among billionaires was so high because Bill and Warren had already given away their figurative hundred grand! What's done is done, and if the law changes then it was given away for no good reason. Therefore a great reason to make huge charitable donations you're your estate has been rendered completely moot.
What's worse is that under the new tax law everyone will face a new form of the estate tax. Please enjoy another hypothetical. Let's say mom and dad owned $100,000 worth of Ford stock that they originally paid $1,000 for 30 years ago. If they were to sell the stock while they were alive, they'd pay capital gains on the $99,000 of growth, so let's say mom and dad never sell it. Mom and dad bite the bullet and leave everything to their kids. Their total estate is less than the federal exemption amount, so they don't owe any estate taxes.
So the kids inherit the $100,000 of Ford stock tax free. But mom and dad bought all the kids xr4ti's when they turned 16, and since that car was such a piece of crap none of them want to keep the Ford stock. (Despite claims on the Internet to the contrary, the xr4ti was a complete piece of crap) They all sell the stock as soon as they can, and pocket the $100,000.
So how much do the kids owe in taxes? Their parents only paid $1,000 for it back in the day, so conventional wisdom says they'll have to pay taxes on the $99,000 of growth. But in this case conventional wisdom would be wrong. Under the old estate tax rules, people inherited property with a `stepped-up basis,' meaning the cost basis to the inheritor was the value of the property when mom and dad died. That may sound confusing, but it really isn't. The bottom line is if the stock was worth $100,000 when mom and dad died, you inherit it as though you paid $100,000 for the stock.
Great rule, right? Well, bad news. When the estate tax dies, so does this rule. Whatever your parents paid for the stock--that's your cost basis. If you sell that Ford stock for a hundred grand, you'll pay capital gains on the $99,000 in growth (figure between $15,000-$20,000 in taxes).
Under the old system this typical middle-class scenario would generate no revenue for the federal government. Under the new law, the government's gonna get $15,000-$20,000. Oh, and guess what? Under the old system only 2% of estates were susceptible to the tax. But under the new system, anyone who owns stock and tries to pass it on to their kids will be affected. And here's the finisher--over 50% of Americans currently own stock.
So instead of having a completely avoidable tax that affects only 2% of Americans, we'll have an unavoidable tax that will affect over 50% of Americans! And many middle-class families are clamoring for this tax to be repealed. Sometimes you just have to stand back and marvel at how good the right-wing is at convincing people to act counter to their own best interest! It's like an Orwellian wet dream. Winston Smith is begging to have that rat cage slapped on his face. "Come on! It'll be good for me! Do it!"
WAR IS PEACE! FREEDOM IS SLAVERY! IGNORANCE IS STRENGTH!
Now I'm just scaring myself. Suffice it to say that the repealed estate tax will do the same thing that every Bush doctrine does. Shift the tax burden from those who can afford to pay it to those who can't. Hopefully the Senate will smack this thing down (for the third time), but if they don't remember you heard it here first. The little guy's getting screwed...AGAIN.
