In 2010, all Americans will be able to do something that hasn’t been possible for wealthy decedents since 1916: they can die for free. All of their property will be exempt from taxation but only for one year. In 2010, they will be able to pass on all of their possessions, including all cash, securities, real estate, insurance, trusts, annuities, business interests and any other assets to the next generation without any tax consequences. This is the felicitous by-product of the US Economic Growth and Tax Relief Reconciliation Act, passed in 2001. Under that legislation, the estate tax is currently 45% on all assets with a unified credit exemption that rose gradually from $1 million in 2002 to $3.5 million in 2009. In 2010, the exemption becomes infinite. The estate tax is repealed for one year and no tax will be applied to any estate, regardless how large. However, under current law, the estate tax appears again in 2011, and the exemption is lowered to $1 million. Everything above that amount will be taxed at 55%!
How did it happen?
In 2001, Congress was certain that such a ridiculous outcome would be avoided at all costs and that future legislators would be forced to act well before 2010 to prevent it. Guess what? Here we are, less than three months before the end of the year, and Congress is nowhere near amending that law. Moreover, one would have thought that this government would have every incentive to ensure maximum revenues in light of the unprecedented amounts being spent on two wars, recurrent stimulus packages and the bailouts of at least two industries (finance and automotive). Nevertheless, to date we have seen little activity among legislators. Instead we have been treated to endless speculation among lawyers, albeit stimulating debate among philosophers. Let’s review the pros and cons:
Heredity versus merit
Winston Churchill argued that estate taxes were “a certain corrective against the development of a race of idle rich.” We all know that Sir Winston was far from idle. He was a prolific author, legislator and statesman. He worked in government most of his life and realized that the public sector could not function without considerable tax revenues. So perhaps it’s no surprise that he was a proponent of this unique tax on property that belonged to someone whose vote disappeared at precisely the same moment that the government became entitled to its share of his estate. Moreover, Sir Winston wasn’t very rich.
However, some of the richest men in America, including Warren Buffet, George Soros and Bill Gates, favor an estate tax just as strenuously. They argue that allowing the rich to bequeath unlimited wealth to future generations will remove any incentive for those future generations to work. According to Buffet, the estate tax plays a critical role in promoting economic growth and helps create a society in which success is based on merit rather than inheritance. “Without the estate tax, you will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit." Amusingly, Buffet pointed out that repealing the estate tax "would be the equivalent of choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics." (NY Times, February 14, 2001)
I have not spoken with Buffet’s, Soros’s or Gates’s children, but I doubt they would share their fathers’ views on this issue. In any event, the wealthy trio is determined to give most of their money to charity, thus disinheriting not only their children, grandchildren, cousins and aunts but also their dear, beloved uncle… Uncle Sam.
Why estate taxes are evil
Opponents of the tax base their hostility on the other side of the moral coin: While the inheritor may not have a direct moral claim to the wealth he will inherit, neither does anyone else, except for the deceased wealth creator. Moreover, the wealth creator paid taxes on her assets, including all annual gains and interest, throughout her life. She should have the right to dispose of her wealth any way she deems fit, whether to charity, to the government or to designated beneficiaries. These estate tax opponents are offended that the power of government will be wielded to confiscate wealth on behalf of unknown others who are no more worthy than the idle beneficiaries of the deceased.
The forces of repeal point out that countries ostensibly more socialist than the US (such as Australia and Canada) repealed their version of this tax in the 1980s, while Sweden and Russia repealed theirs in the past five years. Colorfully, in various media outlets, they consistently label the estate tax as the “Death Tax.” However, fidelity to history would render the term “War Tax” more accurate. Congress first introduced an estate tax in 1797 to help pay for naval rearmament. It was repealed four years later as the need for the revenue receded. In 1862, during the Civil War, a direct tax on inheritances was imposed again to pay for the war effort. This tax was then abolished by 1870. In 1898, an estate tax was imposed to pay for the Spanish-American War -- and then repealed in 1902.
America's fourth estate tax was enacted in 1916, during the First World War and, in one form or another, has remained in effect ever since. While America has not been at war consistently throughout that period, it currently finds itself engaged in two major conflicts and there does not seem to be much relief for the country’s military expenditures. As a result, most prognosticators predict that Congress will retain some form of the estate tax but no one seems to know how or when such legislation will be passed.
Under current law, there is some excellent news for very wealthy people who happen to be sick: Your family will spare no effort or expense to keep you alive until January 1, 2010. The bad news is that on that fateful day, their attitude will shift from “life support at any price” to “throw momma off the train.” On that day, you may find that the finest doctors in the country who have been providing you with the best health care money can buy will suddenly be replaced by the notorious Dr. Kevorkian!
If you feel that you belong in this group of wealth creators at risk, here’s my friendly advice: Enjoy the boundless love of your doting and adoring family until the end of this year. Celebrate New Year’s Eve in style. However, as the ball falls in Times Square, make sure you sneak away and enter the witness protection program!
Here’s where the strategy gets interesting, especially for those born to a Jewish mother. While incognito, find your local Israeli representative, and consider aliya to Israel. Despite its many wars, Israel has never had an estate tax and is unlikely to promulgate one. While I’m not sure that this is what David Ben Gurion and his fellow progenitors had in mind, under the Law of Return, Jews from around the world are entitled to citizenship if they move to Israel and make that country their home. However, the IRS taxes all US citizens on their world-wide income, so our new immigrants would have to jettison all American political ties, sell their real property and remove their other assets from the United States. In retrospect, it seems like a great deal of trouble unless, like many, you consider Israel compelling for its plentiful other attractions.
Lyon (Lenny) Roth is a senior executive at an international wealth management firm and a member of Ben Gurion University's Board of Governors
Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009