The Demise of Estate Tax Planning

By :: September 10th, 2013

A fascinating story in last Friday’s Wall Street Journal reports what I suppose was an inevitable trend: With the estate tax exemption now up to $5.25 million ($10.5 million for couples) estate tax lawyers are running out of work. So, writes the Journal’s Arden Dale, they are turning to income tax planning for high-net worth clients.

The Tax Policy Center estimates that this year only 3,780 estates will have assets exceeding $5 million and barely 2,000 of those will have $10 million or more. Since it is likely that most people with estates of this size have already done their tax planning, there is just not going to be a lot of new business out there.

Of course, some states have lower thresholds that will keep estate tax attorneys busy. And the wealthy have reasons other than than pure tax savings to do estate planning. But still, what’s a lawyer to do? Some are even urging clients to unwind their trusts.

Dale finds that some have turned to another form of tax planning—finding ways for rich clients to shuffle money to relatives with the aim of reducing income tax liability. As Dale notes, this sort of asset shifting is much simpler than the complex world of trusts.

For instance, a high tax-bracket parent could lend money to a lower-bracket child at today’s very low interest rates. The child could invest the funds and live off capital gains, dividends, and interest but the parent would get the inital loan back.  Or, a wealthy client can maximize contributions to retirement plans such as 401(k)s and Roth IRAs since distributions from those accounts are not subject to the new 3.8 percent investment tax that was enacted as part of the 2010 Affordable Care Act.

There is nothing new about wealthy people hiring lawyers to help them reduce their income taxes. For years, they’ve been turning ordinary income into capital gains, deferring income, or shifting income offshore in order to lower their taxes.    

But it is interesting that, as the estate tax exemption has steadily increased (under a Democratic president of all things), estate tax lawyers are scrambling for work. With both income tax rates and estate tax exemptions rising it is hardly surprising that enterprising tax lawyers will follow Willie Sutton’s timeless advice and go where the money is.        

 

 

 

17Comments

  1. Michael Bindner  ::  11:59 pm on September 10th, 2013:

    Many in the capital ownership reform community favor doing away with the estate tax altogether and instead taxing income from estates as normal income (and not just the capital gains, but the entire distribution). Usually there would be a middle class income exclusion, say $100,000 and of course such distributions would still be tax free if assets were sold to a qualified ESOP.

  2. Tax Roundup, 9/11/2013: Gutterball edition. And states where they get more than you do. « Roth & Company, P.C  ::  8:34 am on September 11th, 2013:

    […] Gleckman, The Demise of Estate Tax Planning (TaxVox): “With the estate tax exemption now up to $5.25 million ($10.5 million for couples) […]

  3. AMTbuff  ::  4:16 pm on September 11th, 2013:

    “Many in the capital ownership reform community favor doing away with the estate tax altogether and instead taxing income from estates as normal income (and not just the capital gains, but the entire distribution). Usually there would be a middle class income exclusion, say $100,000″

    Michael, think this through. This rule would penalize any effort to provide for one’s own retirement, health care, and nursing home expenses. People would be pushed to rely on government spending to cover all those costs, avoiding saving any after-tax money. Could that be the hidden objective of this proposal?

  4. Ralph H  ::  4:40 pm on September 11th, 2013:

    Just to amplify your comment, it would destroy family farms, business’, and any incentive to save or invest. A true “progressive”/communist utopia.

  5. Michael Bindner  ::  5:46 pm on September 11th, 2013:

    It would not destroy family farms and businesses because you would only sell distributions from assets. Assets being used would not be taxed at all.

  6. Michael Bindner  ::  5:50 pm on September 11th, 2013:

    People who live on inherited assets generally don’t need to work, although some do and taxing those distributions at normal income rates (which in a world with a large consumption tax would be between 7% and 28% for people getting half a million a year). If someone has that much income from inheritance they would generally have no need for additional retirement savings. It would be nice, indeed, if we found a way to make such people forever ineligible for government programs through getting rid of their money to avoid having any assets to spend down.

  7. Michael Bindner  ::  5:58 pm on September 11th, 2013:

    http://cog.kent.edu/DC%20Conference/Index.htm

  8. John gregor  ::  2:21 am on September 12th, 2013:

    I agree with your point that- it is likely that most people with estates of Vast size have already done their tax planning, there is just not going to be a lot of new business out there.
    but what about the local people out there?

  9. Ralph H  ::  4:32 pm on September 12th, 2013:

    Lets say you have a 2.5Mil farm or business which may, in fact support one person comfortably with little debt. You die and leave it to 5 kids. It is likely that only 1 is interested in running it; the rest are professionals, possibly even DC Think Tank type people. Only 2 possibilities exist – sell all, probably to a larger corporation or ag conglomerate, or have the one kid buy his 4 siblings out. It may be unlikely that the interested kid can get financing or make a go of it with additional debt. That’s why we are increasingly seeing wealth concentrated in big entities.

    Also, I don’t know what planet you are on but if you think $100,000 or even $500,000 will afford much of a retirement you have not done the math. Especially in todays interest rate environment you would live (with SSI) close to the NJ poverty level. The alternative is to tax us at super high rates so the Government can give everyone a retirement at lower middle class levels.

  10. 2014 TAXES PAYCHECK  ::  8:06 pm on September 12th, 2013:

    […] TaxVox » Blog Archive » The Demise of Estate Tax Planning […]

  11. 2014 NEW TAXES REAL ESTATE  ::  5:27 am on September 16th, 2013:

    […] TaxVox » Blog Archive » The Demise of Estate Tax Planning […]

  12. Secondary Sources: Emerging Markets, Estate Taxes, Monkeynomics – Real Time Economics – WSJ  ::  6:34 pm on September 18th, 2013:

    […] –Estate Taxes: Howard Gleckman looks at how the decline estates facing tax has led to less planning. ” The Tax Policy Center estimates that this year only 3,780 estates will have assets exceeding $5 million and barely 2,000 of those will have $10 million or more. Since it is likely that most people with estates of this size have already done their tax planning, there is just not going to be a lot of new business out there. Of course, some states have lower thresholds that will keep estate tax attorneys busy. And the wealthy have reasons other than than pure tax savings to do estate planning. But still, what’s a lawyer to do? Some are even urging clients to unwind their trusts.” […]

  13. Stephen Pett  ::  5:49 am on September 29th, 2013:

    Over the pond in the UK, Inheritance Tax is becoming a tax payable on the estates of home owners, as the average value of a home doesn’t leave much space to have any savings.
    In effect, we have a three class Inheritance System:
    1) those whose parents need Long Term Care inherit next to nothing.
    2) those whose parents prefer to give money to the Taxman rather than their children but avoid care lose up to 40% in Inheritance Tax.
    3) Those whose parents take sound advice inherit the lot.

    As we say here, ho hum!

  14. Thomas Rockford  ::  11:16 pm on January 31st, 2014:

    One of the issues with the entire tax code….estate (or death if you prefer), individual and corporate….is that it is far more complex than it needs to be. We should separate raising the funds for government from trying to implement social change. So we end up with millions of folks and billions of hours being spend trying to comply in the most efficient manner with the tax code. All wasted time and effort as far as creating national prosperity. Yes, people can spend a lot of time and money avoiding most of the estate tax….but why force them to?

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