Last week, President Obama announced his desire to extend most of the Bush tax cuts for those earning more than $250,000 annually. Of course, his plan has no chance of passing the Republican-controlled House of Representatives.
However, there is a provision in his plan that could affect far more than the "evil" 1 percent he is targeting. President Obama wants to impose an estate tax of 55 percent on those who die with more than $1 million in assets. This provision will significantly impact many in a very big way. Here's why.
Many people who are not rich will have estates exceeding $1 million. This is because we may buy life insurance to support our families. If you are married and have a couple of children, it is easy to see how a $1 million may be the minimum necessary to support your wife and children for the next 40 years or possibly more (especially when stock market investments and interest bearing accounts generate so little income).
In addition, many small businesses will be hit. This is because the IRS may value a business at a multiple of its earnings. So if it earns $200,000 in a year, the IRS may value it at eight times that amount, or $1.6 million. Your estate may then be forced to pay $300,000 in estate taxes or close the business and sell its assets at IRS auction value.
Especially hard hit are farmers and others owning real estate. The IRS can value these at their highest and best use, and force you to pay estate taxes on that inflated
value. Worst of all, this has historically generated a great deal of litigation on valuation -- something the tax court hates to spend time on.Obama's plan will resurrect the phony estate tax planning industry all over again. Today, the federal tax law exempts over $5 million from the estate tax. This allows us to use simple, inexpensive wills and to leave our assets to those we love and care about simply and without restriction. But under Obama's plan we will see complex estate tax planning such as marital deduction trusts, defective grantor trusts, family limited partnership agreements and a list of other complex and expensive schemes designed to avoid this punitive tax.
Obama frequently complains of fairness. But if you want to leave money to your spouse and children, your corporation historically had to pay 30 percent tax as its income, and then you had to pay 30 percent tax in the distribution of that income to you.
If Obama gets his way, you'll have to pay another 55 percent on what's left over (after $1 million exemption). I don't see the fairness in this.
The estate tax has never raised any significant federal taxes. It was designed to hit the incredibly wealthy families who established dynasty trusts to spoil their heirs for generations (e.g. Paris Hiltons, Kennedys, Mellons, etc). It was never designed or intended to be a fundraiser for the federal government.
We all like to talk about racial prejudice, but we never talk about economic prejudice. The truth is the estate tax proposed by President Obama is confiscatory. It is designed to redistribute our hard-earned assets to the federal government to pay for its entitlement programs.
Regardless of your personal views on the coming election, I'm here to tell you about a hidden provision no one is talking about and the consequences to people who least expect it.
El Paso lawyer David Leeper may be reached at leepertaxlaw.com.
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