DEATH or WEALTH TRANSFER TAX

1
DEATH or WEALTH TRANSFER TAX

• ESTATE TAX
• GIFT TAX
• UNIFIED TRANSFER TAX SYSTEM
• GENERATION SKIPPING TRANSFER
• TAX

2
HISTORY

• primary function to hinder the accumulation of
  wealth by family units redistribution of wealth
• 1916 Congress imposed a tax on transfer of
  property triggered by the death of an individual
  Federal Estate Tax
• loophole give away property before death
  Congress enacted first Federal Gift tax to
  prevent full scale avoidance of the estate tax
  (1924)

3
FEDERAL ESTATE TAX

• often referred to as an excise tax on the
  transfer of decedents net wealth
• TAX ON DECEDENTS ESTATE or on the value of all
  property owned at date of death (property fair
  market value)
• Reduced by deductions for funeral and
  administrative expenses, debts, certain taxes and
  losses, unlimited charitable gifts as well as
  unlimited marital deductions (The Economic
  Recovery Tax Act of 1981)

4
FEDERAL ESTATE TAX

• Since 1976 Federal Estate tax and Federal Gift
  tax became the unified transfer tax, (Tax Reform
  Act of 1976)
• like an income tax, it is progressive
• unlike the income tax, it is computed
  cumulatively
• Taxable gifts made after December 31st, 1976 are
  added to the taxable estate to arrive at total
  taxable transfer

5
FEDERAL ESTATE TAX

• All gift taxes paid on post-1976 bequests and
  certain tax credits are deducted from the
  tentative tax (tax on all gifts made to date)
  Federal estate tax due
• UNIFIED CREDIT life time credit available for
  all taxable transfers enacted to reduce the
  effect of multiple taxation
• Unified credit eroded with inflation Taxpayer
  Relief Act of 1997 (exemption increase to
  1,000,000)

6
FEDERAL ESTATE TAX

• Economic Growth and Tax Relief Reconciliation Act
  of 2001 (slow phasing out of the estate tax
  2010 repealed)
• CREDIT
  EXEMPTION EQUIVALENT

7
FEDERAL ESTATE TAX

• EXAMPLE
• no taxable gifts made prior to decedents death
  in 2002
• Tentative tax on taxable estate is 470,000
• Therefore, with unified tax credit the Federal
  estate tax / unified transfer tax due will be
  124,200

8
FEDERAL GIFT TAX

• Purpose to prevent taxpayers from avoidance of
  the Federal estate tax
• Donor allowed an annual exclusion of 10,000 per
  donee ( 11,000 in 2002)
• i.e. Father gave each one of his five children
  11,000 for Easter in 2002 2003,
• Overall, he transferred 110,000, but he made no
  taxable gifts
• Unlimited marital and charitable deductions
• Giftsplitting available to a married donor

9
State Local Transfer Taxes

• Inheritance tax on the right to receive property
  at death (imposed on beneficiaries)
• Inheritance tax rate is inversely related to the
  relationship between the decedent and the
  recipient as well as exemptions
• Many states also impose estate taxes on the
  decedents estate (lower than federal)

10
State Local Transfer Taxes

• CREDIT- any state estate taxes are credited
  against federal estate tax .however, the EGaTRR
  Act of 2001 will eventually eliminate it
• Nine states impose a state gift tax, like the
  Federal gift tax they usually provide for
  lifetime exemptions and annual exclusions
• State gift tax rates usually follow the pattern
  of state inheritance taxes

11
GENERATION SKIPPING TRANSFER TAX

• Involves at least three generations of tax payers
  
• direct skip an outright transfer of wealth for
  the sole benefit of persons at least two
  generations younger than the transferor
• generation in between skips the tax
• generally, a flat tax rate of 55 with exemption
  of 1,100,000 with no gift tax implications

12
DEATH TAX CONTROVERSY

• CURRENT LAW
• June 7th, 2001 President Bush signed into law the
  11-year, 1.35 trillion tax cut package causing
  estate tax to be repealed in 2010, but only for
  one year
• How will estate tax repeal effect
• charities- Ralph Wanger argues that many
  decedents will leave for their families
  previously set amount and the rest will go to
  their favorite causes.spillover effect may in
  fact increase charity giving (no death tax more
  to bequest)

13
Ralph Wangers view

• Death tax has 2 functions,
• To raise revenue for the government
• not responsive constitutes about 2 of total
  tax revenue
• Wealthy person confronts a marginal tax rate of
  76 24 of his income gets passed down to his
  heirs
• Therefore, wealthy people prefer to take early
  retirements and burn their money
• If death tax was repealed or reduced they might
  feel encouraged to work few extra years, generate
  lots of income tax and create new jobs

14
Ralph Wangers view

• 2nd goal of taxation is to redistribute money
  for social engineering goals
• Death tax established as a part of general
  populist revolution against the enormous wealth
  of Rockeffeller, Mellon(no income tax until 1908
  so fortunes grew w/o any benefit to the gvt.)
• Death tax back then made sense... made up for
  lost taxes on such fortunes
• However, todays fortunes are taxed on the
  individual and corporate leveltherefore death
  tax OVERKILL

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DEATH TAX CONTROVERSY cont.

• Impact on heirs inheritance affirmative
  action for rich kids
• Moral argument heartless to compound familys
  grief with taxes
• Gale and Slemrod argue that taxation after death
  is a convenient tax handle
• No one is advocating for another tax that would
  replace the death tax
• Estate tax meant to capture tax on previously
  accrued but unrealized capital gains

16
GALE and SLEMROD

• Concentration of wealth estate tax to
  redistribute the wealthhowever, unrealistic to
  expect a tax raising 0.3 of GDP would seriously
  decrease inequalityperhaps increase it !
• Impact on saving hard to determine since people
  are motivated by various factors in their giving
• Impact on survival of small businesses small
  numbers pay estate taxes therefore unlikely why
  family businesses do not pass to the next
  generation

17
Where do we go from here?

• Repeal the death tax and see what happens
• could hurt non-profit organizations,
• will reduce federal revenues,
• might not even raise savings, labor supply or
  growth
• create a loophole in regard to capital gains
• do away with the most progressive federal tax