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Bottom Line: Estate Tax Is A Lousy Tax

I am a registered Democrat and an estate planner, but I would like to see the estate tax repealed. I simply think it's a lousy tax.

It's a lousy tax because it often asks us to know the unknowable, which is how much something is worth. Sure, some things like money and publicly traded stocks are easy to value. But what about bonds that have no established market? Collectibles? Real estate? Interests in closely held businesses?

We must perform appraisals to get values for these types of assets. Appraisals are just estimates. If you don’t think those estimates can vary much, read some of the cases that go to Tax Court involving disagreements between taxpayers and the Internal Revenue Service. Two taxpayers in identical situations can pay widely varying taxes, depending on the luck of the draw.

Income taxes are based on real transactions that are almost always easily valued. You collect $10 of wages or capital gains, you pay tax on $10. Valuation arguments on income are rare.

It’s also a lousy tax because it seeks to arbitrarily redistribute wealth in society. If you think Bill Gates has too much money and power, why wait until some of it goes to his children before taking it away? If his children are fools when it comes to money, they will soon be parted. If not, what is the problem? Does the fact that his children inherit great wealth somehow reduce the opportunity for the rest of us to succeed?

Of course, much of Bill Gates’ wealth has never been taxed because it is held in appreciated Microsoft stock. The practical approach is to tax that appreciation as capital gains, either at Gates’ death or, more sensibly, when his heirs sell the stock and have some cash with which to pay the tax.

Finally, it’s a lousy tax because it induces a lot of transactions that otherwise would never occur. We should buy insurance because we have some economic value that needs protection. We should establish trusts because some assets require that form of management. We should make gifts to children and charities because we deem this to be the best use of our resources. We should not be impelled to do any of these things because the government threatens to grab most of what we have accumulated if we do not.

I am not the least bit worried about my estate planning business drying up. In the short term, I will have all I can do to help clients plan for any reform or repeal of the tax, and the possibility of a future change in policy. Down the road, it will be nice to focus more attention on helping each client build an estate and deploy it wisely, rather than just keeping some of it in the family.

For more on this topic, click on these related articles from the April issue of Sentinel:

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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