In a few weeks, about 2,000 of the country’s best estate planners — most of them attorneys — will gather in Florida for an annual technical conference which, this year, is likely to be more of a pep rally.
The estate tax has been dropped, at least for now, from the federal tax code. Nearly all of these lawyers want it restored ASAP. Safe amid the obscurity of the 44th Annual Heckerling Institute on Estate Planning, there will be vigorous denunciations of Congress for letting the tax lapse, while knowledgeable insiders will reassure attendees that lawmakers soon will set the universe back on its axis.
Of course, it is a little awkward to explain to clients why you want to resurrect the tax that they pay you a lot of money to help them avoid or minimize. Most of these professional advocates will keep their names off any public calls to restore an estate tax. Instead, they will work through professional organizations like the American Bar Association and the American College of Trust and Estate Counsel, and they will enlist surrogates to carry their message to Capitol Hill and the media.
They will have no shortage of volunteers. The estate tax represents big money to a lot of people besides attorneys. The life insurance industry developed an entire product line, second-to-die insurance, to provide cash for tax payments that usually come due when both spouses are deceased. Colleges, hospitals and other nonprofits worry that without a tax incentive for charitable bequests, an important funding source will dry up. Financially strapped state governments would have a difficult time administering their own estate taxes in the absence of a federal reporting requirement.
All of these players will plead their case, often with the behind-the-scenes help of the lawyers.
So will some high-profile rich folks, like Bill Gates Sr., himself a retired attorney, who inherited his prominence from his son, and Warren Buffet, the legendary investor who has pledged to give or bequeath 85 percent of his fortune to the Gates Foundation, which is run by Bill Sr. The elder Gates is so committed to the principle of taxing accumulated wealth that he co-authored a book on the subject.
Of course, if you already intend to leave your fortune to charity as Buffet does, the estate tax is no big deal, because it exempts charitable bequests. The principle at issue is the taxation of other people’s wealth.
Estate tax proponents will trot out a familiar litany of arguments. One is the aforementioned effect on charities, though it strikes me as pathetic that these worthy philanthropies might need the threat of confiscatory taxation to generate support.
Another is that it is un-American to allow substantial wealth to flow across multiple generations, creating a New World aristocracy. But wealth has long been conserved across generations — to their clients’ faces, attorneys call it “stewardship” — from the first large land grants in the Colonies to the Industrial Revolution fortunes of the Gilded Age. Estate taxes arrived only in 1916, ostensibly to fill gaps in the income tax.
In any event, we do not rely on land or other limited physical resources to create wealth in the 21st century, so there seems to be little risk of a permanent aristocracy. Bill Gates Jr. built the country’s largest fortune on nothing more tangible than some computer code (much of which he bought) and hard-nosed business practices. Buffet likewise created his net worth by accumulating contracts and stock certificates, not acreage and chattel.
Estate tax proponents will argue that the income tax rules that would replace the estate tax this year, known as “carryover basis,” are probably unworkable and certainly unfair because they tax the merely affluent rather than just the very wealthy (if the recent $3.5 million threshold for estate taxation qualifies as “very wealthy”). This is nonsense. Basis records can be complex, but they can be maintained even if we must carry them over from a decedent to his or her heirs. In the absence of accurate records, basis is simply deemed to be zero when capital gains are calculated. And the government can set exemptions and tax rates to raise any amount of revenue it chooses, from nearly any subset of taxpayers it wants. We don’t need an estate tax to do this.
I think the bigger problem with carryover basis, from the attorneys’ point of view, is that accountants, not lawyers, typically prepare income tax returns and therefore would get the responsibility (and fees) associated with maintaining good basis records. I am an accountant, so you may consider me biased, but I do not see this as a valid reason for restoring estate taxes, either.
Now that the estate tax has flatlined, here are my arguments for putting away the paddles and pronouncing it dead. First, the tax depends on often arbitrary and debatable values, since the transaction that triggers it — death — does not involve any sort of sale or exchange. Second, the triggering event — death — does not provide any cash with which to pay the tax. Just because an estate is large doesn’t mean that its value is easily accessible. Those who inherit valuable real estate or businesses may have to sell off pieces of their inheritance in order to pay the tax bill. The insurance industry with its second-to-die products is comfortable with this, but I am not.
Third, and most importantly, the tax is an assault on private property itself. Ownership carries with it the right to dispose of our property as we see fit, whether to our children, to charities like the Gates Foundation, or to the government. When the estate tax is involved, we never truly own our property; each generation has to buy it back from the tax collectors.
Suppose you spend a lifetime accumulating real estate to provide some income for your retirement and then for your children, who may thereby be freed to pursue more gratifying but lower-paid careers. Why should your plans be thwarted because your children must sell the property in order to give the government its cut? The government could instead wait and take its share from the income generated by the property over the years. Or it can collect its tax when your heirs sell the property of their own accord.
Lawyers have as much right to their political opinions as anyone else, and they are free to express those opinions however they choose. But you, Mr. and Mrs. Client, are free to ask your attorney whose side he is really on. The answer might surprise you.
You know where I stand. I am an estate planner who would be happy to see the estate tax buried for good. Sure, my firm will pick up some extra income tax work thanks to carryover basis, but that is not the point. We will keep busy helping our clients no matter what tax laws Congress comes up with.
There are better, fairer ways to fund our government, though few of my fellow attendees at this year’s Heckerling conference may think so.
The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.