Best year to die: 2010 when estate tax law repealed

Author: Howard Gordon

Published: June 17, 2005

The on-again, off-again estate tax certainly makes planning incredibly difficult for those with large estates. The uncertainty wasn't helped much when the House of Representatives voted to repeal the estate tax completely in April. The question is, what will happen in the Senate?

Currently, the estate tax exemption for 2005 is $1.5 million. This means that the first $1.5 million of your estate is exempt from estate tax. With the use of trusts and some planning, a married couple can easily exclude a total of $3 million, $1.5 million each, from taxation. As currently scheduled in 2006 the individual exemption will increase to $2 million, which means a married couple will be able to exclude $4 million in tax. It will remain at the $4 million level until 2009, when the individual exclusion will be increased, once again, to $3.5 million or $7 million for a married couple.

The year to die is 2010 because the estate tax would be completely repealed under the current law. Unfortunately, living past 2010 ruins everything. In 2011, the estate tax will be reinstated, with only a $1 million exemption and a top tax rate of 55 percent.

A complete repeal of the estate tax is not easy, since the total cost would be almost $300 billion over a 10-year period. This would be added to an already large deficit. The fact that the majority of the savings will go to the upper 1 percent of all households makes it even more questionable. Especially considering recent studies, which have shown a greater than ever schism between the very wealthy and everyone else.

These studies have shown that the income earned by the top 0.1 percent of all earners has more than doubled since 1980 to a total of 7.4 percent of all income in 2002. The income earned by the bottom 90 percent has actually fallen.

With that as a background a $15 million ad campaign has been started by a group called the American Family Business Institute and Free Enterprise Fund to urge the Senate to vote for the complete repeal of the estate tax before the August recess. The ads claim, "The estate tax can bury your family in crippling tax bills." According to the non-partisan factcheck.org less than 3 percent of deceased adults in 2002, when the exemption was only $1 million, were subject to the tax.

The ads indicate that most family farms and family businesses are subject to the estate tax and often claim that many are forced to be sold because of it. The Tax Policy Center has found that less than 500 estates of decedents with family businesses or farms were subject to the estate tax in 2004. No one has ever shown that any farm has been forced to be sold because of the estate tax. Of those 500 or so taxable farm and business estates in 2004, 40 percent of them paid an average tax rate of 1.6 percent.

It was only the very largest estates valued at over $20 million that paid a higher rate and even that rate was just over 22 percent.

The discussion often is that the estate tax is really a double tax since the assets in your estate have already been taxed, but the truth of the matter is that many estates, especially larger ones are made up of stocks, bonds and real estate that have appreciated in value over the years. This appreciation has never been taxed.

Studies have shown that the unrealized profits in estates make up approximately 40 percent of the total value of the estates. Estates worth more than $10 million have almost 60 percent of their value in untaxed capital gains.

The repeal of the estate tax would allow these assets to escape taxation.

If the exemption was raised to $3.5 million ($7 million for a married couple) and a top rate of 45 percent, then almost half of the revenue from the tax could be maintained.

Remember that the median net worth is less than $100,000, exempting $7 million removes 99 percent of us from the tax.