Estate Taxes are one of the issues being kicked around as Ds and Rs try to attach spin words to each other’s positions. Rs argue it is a “death tax” that confiscates money that was already taxed in the decedent’s lifetime. Ds argue it is designed to “tax the wealthy” and helps preserve social mobility.

They are both right.

What is also true now and wasn’t 10 years ago is that revenues are desperately needed by the US Government as it continues a spending trajectory that basically ignores the recent shrinkage of the tax revenue base.

Here is an opinion item in the CSM that lays out what percentage of estates have been hit with estate tax and an alleged $250 Billion revenue hole we now have.

It is a good article in that it lays out some basic numbers but leaves readers with inferences that should not be embraced.

For example, stating that 2% of estates would be subject to a lower estate tax threshold implies that those are the top 2%. They aren’t. Estate Planning by smart accountants and attorneys gets most estate assets into Trusts that allow them to move to the next generation tax free. This has existed for some time. So when you see articles asserting “how few estates have been hit with the tax in the past” keep in mind the large number of high value estates that avoided estate tax altogether.

Are there exceptions? Absolutely. DeWitt and Lila Wallace failed to take full advantage of the “stepped up basis rule” with regard to their core family asset, Reader’s Digest so in the years after Lila Wallace died (1984) the heirs tried to use debt and free cash flow from the magazine to pay estate tax obligations. In 1990 they simply sold the company by taking it public.

Outside of trusts and the stepped up basis rule, estates also buy big life insurance policies. There is a rule in the tax code that says the payout of a life insurance policy cannot be taxed (in theory because the premiums are paid with after tax dollars). Berkshire Hathaway holds the largest portfolio of life insurance policies in the country and those policies, due to slack demand, have gotten cheaper and cheaper in the last few years. Life Insurers 9depending on how you account for lobby spending) are ranked in the top 5 political money donors to federal elections. Estate tax avoidance is a big market for them.

The current system (at least the one scheduled to resume Jan 1) tends to hit those who have accumulated wealth but have failed to plan. Those tend to be owner/operator entrepreneurs who started a family business - like the Wallaces. The more sophisticated (like the Gettys or the Waltons) know how to structure multigenerational Trust dynasties.

If reform is needed (it is) and the desire is to promote economic mobility by deterring dynastic wealth, then a few things are needed -

1) have multiple rates and thresholds that are indexed to the CPI;

2) eliminate the stepped up basis rule for capital gains as part of an estate;

3) force inclusion of trusts as estate assets - even “irrevocable” trusts (charities and universities will shit - too bad)

4) value assets on return on capital so that capital intensive/low margin businesses (like family farms) are valued LOWER than a high margin business with the same asset base (like a software company). Include land in that calculation valued at market price.

5) Tax proceeds of life insurance policies at estate tax level prior to distribution to beneficiaries. Exempt as income on beneficiaries returns.

From there, let congress battle for what the rates and the thresholds are. The current ground rules are already skewed to preserving dynastic wealth, so claims made by both sides stand on very weak ground