Real world tax discussions at the top brackets...

[Woolleybugger]

My brother in law is married into a local family that has owned property in the Santa Barbara, Carpinteria and Oxnard areas for over 100 years. Over the years, they grew crops on most of it and lead a typical upper middle class life as farmers and ranchers. They never had tons of cash and they still do not have tons of income. They do have tens of millions of dollars in assets though which are subject to the estate tax. They protected some of it by taking out a multi-million dollar life insurance policy on their father to cover taxes. Now they are faced with a property on some of the most expensive beach front property in the world. Kevin Costner is their neighbor. George Lucas just bought a 300 foot beach front property with a wonderful 70s era architectural gem on it which he is going to demolish to replace it with a gigantic Cape Cod monstrosity. Each piece of land on this strip of beach is worth millions. Down the beach, Ty Warner bought up the whole point building a home so massive it looks like a museum.

What is the problem? Well, grandma is living in a home so wonderful that it would be a shame to have to sell it to pay taxes. I surely don't want them to sell it ever. The appraised value is around 7 million. They paid 15 grand for the land in the early 50s and got a famous architect to put a house on it that looks like a wooden yacht.

She wants to give it to her surviving two daughters and the only son of her deceased daughter. She wants to make sure all three daughters got a share of it. Yet one is dead and she wants the state to consider her grandson the same in terms of inheritance as her deceased daughter. The state and the feds don't treat children of direct heirs the same in terms of the estate tax. She can give the home to her two daughters tax free but not the grandson. Boy did we get an earful about this one from this very right wing older woman.

I told her that our kids were not going to have these problems unfortunately. She wants the right to give her estate tax free to any of her family. Her point is that it is her money and she should be able to give it away to anyone tax free. This type of argument is as old as time. In one respect, I fully understand her position. The house is hers and why should the state have a greater right to it than her heirs? But a closer look at history shows why this type of taxation came to be and what it prevents and what it supports. The first issue is one of tax fairness.

If anyone can give anyone else money or land or property tax free then why is this treated differently than income?

The second one is about avoiding what happened in Europe with the rise of inherited wealth and status ie. the nobility or landed gentry.

Is there a prevailing good in passing down fortunes that trumps the fear of creating a class of heirs who are handed everything at no cost?

Teddy Roosevelt would say no. So would many of the robber barons of the late 1800s that prompted the rise of estate taxes. They knew that if their children inherited so much wealth that they never had to lift a finger, it would create a new class of nobility and encourage sloth. Many disagreed though so a compromise was set creating thresholds of untaxable bequeathed estates and wealth with high marginal rates beyond it. Many just gave it away to charity to avoid a huge family mess.

The third issue is one of tax policy itself.

Can the estate taxes be designed to keep family farms, businesses and key holdings intact to avoid generational liquidation solely for the purposes of paying taxes? With the rise of the value of land and wealth, we have been racheting up the estate tax brackets to keep up with the massive explosion of wealth at the top. Could it be refined so that this home could stay in the family? Yes and it has been so refined but not to the point where you can start carving it up throughout your family tree making a mockery of the estate tax in the process.

We discussed this on the way home last night. My wife said exactly what I was thinking. All she has to do is not treat her grandson the same as her living daughters and the house stays in the family. In order for this to work though, she has to accept the notion that estate taxes do serve a function that is good for society and ultimately her heirs. She fails to see that most of her grandkids do not want to farm at all. They are all doing something else and will not continue the family business upon the death of her daughters who are still farm girls. The heir in question is a lazy spoiled brat. No one in the family likes the kid, he does nothing all day long.

So there you have it. The problems these poor rich people have are far removed from the day to day struggles of a typical family. In order for you to sympathize with them, you have to accept the notion that property rights trump almost every other social need or good. If you accept that premise then you are laying the seeds for a new nobility based not upon a monarchy but on the pure power of money itself. It's not an easy issue to consider. But if you watch TMZ, you have plenty of famous heirs to consider when making your decision.

 

[trapdoor]

Woolley: I don't know if you were part of the extensive discussion that Degsme and I had about estate taxes back on the Fray. Basically, he would say, "Too bad for your family -- society says they don't get to keep the family farm.

It's treated differently than income because it isn't income, it is an exchange of ownership and it shouldn't be taxed. Inheritance is not income.

 

[Woolleybugger]

Only if you believe that income is only defined by labor. I view income more expansively to include any transfer of wealth or money between two individuals. I cannot give you a million dollars tax free. I can give you up to 10 grand I believe without you incurring a tax on it. The idea of an estate tax was to avoid generational prosperity creating a landed gentry. The history of mankind has proven many times over what happens when this becomes entrenched. I do understand though that society should not have a sole right to wealth upon death that is greater than an heir. This idea has resulted in the various tax compromises you see all across the world today. I think it is a fair bargain and one that supports both the individual and the greater society as a whole. You disagree. That is why we have elections.

 

[BrianDamage]

She wants the right to give her estate tax free to any of her family.

She effectively can, provided she does it before she dies. Sell it to the two daughters and the grandson for $1.00 each, and "consideration". In this case, being allowed to live in the house rent free until she dies.

 

[Woolleybugger]

Can you send me something that proves this so I can forward it on to them?

 

[Wulk]

I don't know about US law, but, in the UK, the way around such things is to leave the property etc in trust for the grandson and make the sisters the trustees until, either the grandson reaches a certain age, or both sisters die!

 

[Woolleybugger]

Does this avoid taxation or delay it?

 

[BrianDamage]

Can you send me something that proves this so I can forward it on to them?

I sent a lawyer buddy an email. If he grants permission, I'll post his answer.

 

[Wulk]

Avoids taxation. Trusts, in the UK, are non-taxable.

 

[trapdoor]

Only if you believe that income is only defined by labor. I view income more expansively to include any transfer of wealth or money between two individuals.

Traditionally, in both American and English common law, your belief is wrong. Income is one thing, inheritance another. They've never been treated the same.

I cannot give you a million dollars tax free. I can give you up to 10 grand I believe without you incurring a tax on it. The idea of an estate tax was to avoid generational prosperity creating a landed gentry.

No, that was just the idea pinned to it. The estate tax was created to act as a revenue stream.

The history of mankind has proven many times over what happens when this becomes entrenched. I do understand though that society should not have a sole right to wealth upon death that is greater than an heir. This idea has resulted in the various tax compromises you see all across the world today. I think it is a fair bargain and one that supports both the individual and the greater society as a whole. You disagree. That is why we have elections.

I'll never favor taxing a person's death. The "income" if any, was already taxed many times over -- this is just a transfer of ownership. I've seen too many family farms and small businesses destroyed because, no paper, they were enough of an asset to make the estate "rich" enough to be hit by the estate tax, but in reality the families were too poor to pay that tax and their only option was to sell the farm or shutter the business.

 

[Craig]

Traditionally, in both American and English common law, your belief is wrong. Income is one thing, inheritance another. They've never been treated the same.



No, that was just the idea pinned to it. The estate tax was created to act as a revenue stream.



I'll never favor taxing a person's death. The "income" if any, was already taxed many times over -- this is just a transfer of ownership. I've seen too many family farms and small businesses destroyed because, no paper, they were enough of an asset to make the estate "rich" enough to be hit by the estate tax, but in reality the families were too poor to pay that tax and their only option was to sell the farm or shutter the business.

You have personally known "many" small farmers who lost their farms?

Interesting, because the facts say otherwise.


There is overwhelming evidence that the estate tax has never posed a significant problem for farmers. According to the Congressional Budget Office, only 1,659 farmers nationwide owed any estate tax in 2000, when the estate tax exemption stood at just one-third of its current level.[1] Some 1,521 of these estates — or 92 percent of them — had liquid assets that exceeded their estate tax bill, meaning they could not have needed to sell any farmland to pay the estate tax. Moreover, the remaining 138 estates had access to additional tax relief measures designed to ease estate tax burdens for farmers (see the box on page 6). Opponents of the estate tax have not been able to produce a single case in which a family farm had to be sold to pay the tax, even before the exemption was increased sharply in 2001.[2]


http://www.cbpp.org/cms/?fa=view&id=721

 

[trapdoor]

You have personally known "many" small farmers who lost their farms?

No, I have known one family, and had an acquaintance with another, who had to sell farms to pay inheritance taxes. I've seen the same happen to three small businesses. I didn't say I new many -- I said I'd seen too many. One is too many -- our tax scheme shouldn't destroy any farm or business where the desire is to continue to operate.

 

[Craig]

No, I have known one family, and had an acquaintance with another, who had to sell farms to pay inheritance taxes. I've seen the same happen to three small businesses. I didn't say I new many -- I said I'd seen too many. One is too many -- our tax scheme shouldn't destroy any farm or business where the desire is to continue to operate.

Still, I find it fascinating that your anecdote is in direct opposition to this comment from my link:

Opponents of the estate tax have not been able to produce a single case in which a family farm had to be sold to pay the tax, even before the exemption was increased sharply in 2001.[2]

Yet you've seen it happen...to two farms and three small businesses. That's an impressive dichotomy.

 

[Woolleybugger]

I agree which is why there are rising tax brackets for the size of estates. A small farm outside of California is not worth more than 5 million bucks...I will look up the estate tax law and report what the actual brackets are...they are quite generous to heirs IMHO>

 

[Woolleybugger]

Prior to the early 1900s, estates were passed on without penalty. That is exactly what the estate tax remedied. The idea that this is a nation based upon meritocracy and self improvement is critical to accepting the idea that wealth should be taxed at death to encourage heirs to do something productive with their lives rather than sit around in sloth and decadence. Most wealthy people figure out a way to avoid most of it anyway. I fully support an estate tax. In fact, I would argue that no one should ever pass on more than say, 10 million. Everything above that amount would be taxed at 100% per heir to get that money and wealth back into circulation.

 

[trapdoor]

Still, I find it fascinating that your anecdote is in direct opposition to this comment from my link:

Opponents of the estate tax have not been able to produce a single case in which a family farm had to be sold to pay the tax, even before the exemption was increased sharply in 2001.[2]

Yet you've seen it happen...to two farms and three small businesses. That's an impressive dichotomy.

I think they're probably setting the bar too high for proof. You don't necessarily have to sell the farm to pay the tax, it's just that the taxes become so high that it isn't possible to keep the farm profitably -- you have to leverage something that would otherwise be paid for. The big impact is on smaller farms and small businesses that are at the margins.

 

[trapdoor]

Prior to the early 1900s, estates were passed on without penalty. That is exactly what the estate tax remedied. The idea that this is a nation based upon meritocracy and self improvement is critical to accepting the idea that wealth should be taxed at death to encourage heirs to do something productive with their lives rather than sit around in sloth and decadence

.

But the reason many people strive for wealth for a lifetime is so they can leave something to their prosperity. To take half of it away at the end of their lives is a diminution of their effort -- whether that effort has produced $500 or $500 million.

Most wealthy people figure out a way to avoid most of it anyway. I fully support an estate tax. In fact, I would argue that no one should ever pass on more than say, 10 million. Everything above that amount would be taxed at 100% per heir to get that money and wealth back into circulation.

I don't, won't, and never will. To me, it just looks like legalized theft.

 

[Woolleybugger]

I have no problem with it myself. I am surrounded by old money and these folks are lazier than shit. Sure they play around with wineries, avocadoes, horses but none of them has ever really worked a day in their lives and not one of them has ever faced any risk making them quite silly mostly. My brother used to play softball on a traveling slo pitch team that was fully sponsored by an Bloomingdale heir. I know him really well too. Great guy. His daughers wedding in Cabo was covered in the New Yorker. He has never worked a day in his life. He has a giant avocado ranch next to the most expensive property listed in california right now. His other home is in a fabulously wealthy enclave on the country club. He is a season ticket holder for the dodgers. When my bro was dying of cancer, he invited me and my bro to a game. Each seat was 1000 dollars per game. We were right on the third base line, first row.

I am for letting heirs inherit a certain amount because I agree that you do want your kids to be comfortable. But the amount of money now being created and accumulated is so enormous that it serves no economic purpose to allow it to sit around and not be recirculated. Get that dough back in the economy so we can spread it around. If you don't, then the Fed is going to have to create more fake money to replace it anyway.

 

[Woolleybugger]

Well you are a class based culture so this is not a big surprise.

 

[degsme]

I think they're probably setting the bar too high for proof. You don't necessarily have to sell the farm to pay the tax, it's just that the taxes become so high that it isn't possible to keep the farm profitably -- you have to leverage something that would otherwise be paid for. The big impact is on smaller farms and small businesses that are at the margins.

No Trap I think the problem is that you are too credulous. And you don't hold these folks to the same economic standard as you do - say the poor.

The reason they cannot run the farms profitably are not taxes. Becuase if that was the case, they would not be able to sell the farm at all since no buyer would be able to run the farm profitably either. so that claim does not even pass the smell test.

Rather the reason they cannot run their farm profitably is the same reason that you no longer find shops "building PCs" profitably. The economies of scale and standardization have commoditiezed most of the products at such production levels and optimized profit ratios that a small farm cannot operate profitably. For example, just a simply hay farm in eastern WA. First Cutting is coming up soon http://www.dailyrecordnews.com/top_story/first-cutting-of-timothy-hay-season-could-start-soon/article_b41ff7ae-b646-11e1-857a-001a4bcf887a.html It will be about a 1 week long period.

A large scale commercial Grower will be able to run the mower and the baler at full rates dawn to dusk all week long. Fully amortizing the costs.

A small scale farmer will EITHER
have to share/lease equipment with other smaller farms, incuring time and $$ overhead of transfering and also possible losing hay due to rain
OR
Have the $$ invested in the Equipment but run it at less ROI than the large scale grower.

BOTH approaches generate LESS ROI than the commercial scale grower (this is part of what Keen alludes to in his debunking of the THeory of The firm) http://debunkingeconomics.com/Talks/Keen_Imperfect_competition.pps

And LESS ROI means some small farms cease to be profitable. And its not taxes.


Meanwhile income is income. And yes inheritance in the USA has been treated as income WITH A SPECIFIC EXEMPTION given to that form of income.



So unless you actually got to see the books of the families in question going back at least 10 years - to see if they pursued a smart Estate Planning strategy, then you really DO NOT know that this was the problem

For example, if they had, starting say 20 years earlier, progressively gifted $10k in value to their offspring, Each heir would have received $200k in property. Note that $10k from 20 years ago would be $17k of value today. So that's actually $260k of value that's been transfered even though it counts as $200k against the estate taxes.

See that sort of complex financial management IS PART AND PARCEL of corporate farming. But not of individual farming. As with Wooley's example... the issue here is likely that the farmers/parents WANTED TO KEEP OWNING THEIR FARM fully up until the end.

THAT IS THEIR CALL< but that is also bad economic planning. And why should that be rewarded?