During the recent debate on eliminating the estate tax, Congress was reminded of the loop-hole factor—those manifold exceptions that open up ways for people to conserve their estates from governmental confiscation. “In fact, we do not have an estate tax,” declared James Casner of the Harvard Law School in his testimony before a House Ways and Means Committee hearing on estate and gift taxes. “What we have is: You pay an estate tax if you want to.”
There are strategies—legitimate strategies—available right now that enable one to avoid estate taxes. Why more people of means and their advisors are not taking advantage of these strategies has always been a mystery to me.
Remind clients that when they employ a charitable remainder trust, they retain control of the assets right up until the day they die.
The social impact of repeal
Let’s assume for the moment that estate taxes were abolished. What would be the impact on the country? Those who advocate repeal argue that estate taxes, amounting to $30 billion per year, represent only a small portion of the Treasury’s total tax revenue. Can you envision the word “only” used in the same sentence with $30 billion?
As things stand now, if you’re in an estate tax bracket, you have three basic choices of where your assets will go upon your death:
- To your family (approximately 50 percent)
- Social capital (estate taxes: approximately 50 percent)
- Social capital (charity.)
If the estate tax were indeed eliminated, you would, of course, be free to leave it in any manner you choose.
But what would happen to all that social capital? Would the charitable form of social capital dry up, or at least be curtailed drastically? Absent tax incentives, would there be sufficient motivation to contribute social capital to charity?
Moreover, who would pick up the slack created when the charities’ monies dry up? “Big Brother,” of course, the Federal government. In other words, it’s not just a matter of a loss of $30 billion of revenue, it’s literally going to cost the government far more to make up for the loss of services not being provided by charitable organizations. Does that mean less government or more government?
Reportedly, four out of every five people in an estate tax situation have indicated they would prefer to pay taxes than make a contribution to a charity of their choice. Doesn’t that boggle the mind? Don’t these people realize that, when properly arranged, the charitable contribution would come, not from their family’s share, but rather from the government’s share? Don’t they realize that every dollar that flies to Washington makes their community poorer?
Using the wealth replacement trust
Life insurance for the benefit of the tax collector is not the answer. It does not serve to eliminate estate taxes. Rather, it simply provides the money to pay the taxes, albeit on a greatly discounted basis.
Far better that it be used to fund a tax-free wealth replacement trust for the benefit of the family, especially if you can enlist the aid of the Federal government to pay all or part of the premium.
Why not be a hero in the eyes of your community when you can use Uncle Sam’s dollars to do it? Remind clients that when they employ a charitable remainder trust, they retain control of the assets right up until the day they die.
The supreme irony here is that under the present code you can literally do more for yourself than you could if the estate tax were rescinded. Needless to say, your favorite charitable causes would do infinitely better as well.
Even though proposals to eliminate or reduce the estate tax may come up again, they may never pass both houses of Congress and gain a presidential signature, as opposition to the move mounts. Perhaps the general public has yet to realize that repeal of the estate tax would benefit only the wealthiest 2 percent of the population. Those opposing repeal will capitalize on that point and a change in law may never gain enough popular support even to pass Congress again.
Meanwhile, it could be a costly mistake for people of means to sit back, hoping for the repeal of the estate tax-which may or may hot happen. They might be lulled into doing nothing and end up putting their estates in jeopardy, instead of taking the legitimate steps to enable them to zero out the tax on their estate, and literally come out further ahead financially than if the estate tax were repealed.
It’s a choice between inaction based on hope and acting in a world of present legal reality. Those failing to act are a little like the man who married for the second time after a disastrous first marriage, moving Dr. Samuel Johnson to remark, “The triumph of hope over experience.”