Question

In 2017, there is a move to repeal the estate and gift tax. This tax, which impacts families with asset transfers exceeding $22 Million, impact few families in the U.S. discuss why so many people, who are not even impacted by this tax, strongly oppose it. Provide an example from your research on a case (different from your peers) regarding death or gift taxes and provide an analysis of the outcome of the case.

Answer 1

The concept of estate and gift tax is a little disturbing to me. Yes, people generally do not like to pay taxes, specially the rich. But if I was rich, I would oppose to the tax as well. Isn’t it implied that the money being transferred has already been declared as income by the transferee and taxes have already been paid then? After taxes that money becomes liquid, and because that liquid money is being transferred to someone else due to death of the transferee or because it’sbeing gifted, the recipient should have to pay taxes on it again?

In the meantime, starting in January 2018, the gift tax lifetime exemption and the generation-skipping exemption also go up to $11.2 million per donor. This is a golden opportunity for the very wealthy to reduce the size of their taxable estates by making gifts. For example: a couple has assets totaling $30 million. Due to income and growth, they expect that in nine years the value will increase to $40 million. If they die in 2026 and Congress allows the estate tax exemption to snap-back, they could owe over $11 million in estate taxes. However, if in 2018 they gift $11.2 million to their adult children (gift tax free) and $11.2 million to a trust for their grandchildren (free of the generation skipping tax) their estates are reduced to $7.6 million. If they die in 2026 and Congress allows the estate tax exemption to snap-back, their estate tax will be about $3 million. They save about $8 million because of the timely use of the exemptions.

Gifts do not need to be made directly to adult children; rather, they could be made to irrevocable trusts, to generation-skipping trusts, or to buy life insurance payable to a trust. Gifts to could be made to charities while retaining income benefits (as with a charitable lead trust).

Clearly, the very wealthy need to consult with their estate planning attorneys and their accountants to see how the new exemption amounts can be best applied.

Middle-aged adults also need to know that the health insurance mandate was repealed by the tax and jobs act starting in 2019. Under the affordable care act, everyone was required to pay into the health care system to keep the average cost for each person lower. With repeal of that mandate, many younger, healthier members of society will drop their coverage and stop paying into the system. This will increase costs for the older (and often less healthy) members of society. The Congressional Budget Office estimates that about 13 million people will become uninsured by the year 2027, and premiums would increase by 10 percent every year for those who retain their health insurance.

The Tax Foundation has published research suggesting that the estate tax acts as a strong disincentive toward entrepreneurship. Their 1994 study found that the estate tax's 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur's top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Similar past economic studies from the same group have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raised – nearly five times more costly per dollar of revenue than the federal income tax – making it one of the nation's most inefficient revenue sources.