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Death and (No) Taxes: The 2010 Estate Tax Loophole

Written by Nickel - 19 Comments

Death and (No) Taxes: The 2010 Estate Tax LoopholeIn the United States, the estate tax is a tax imposed on the transfer of assets from a deceased individual to their heirs. It’s worth noting here that the estate tax does not generally apply to assets left to a spouse or a charitable organization, but it does apply to assets transferred to children, grandchildren, etc.

In 2009, the estate tax maxed out at 45% on taxable estates in excess of $1.5M. However, a significant amount is typically exempted from such calculations, so only a small fraction of estates are actually subject to the estate tax each year.

So what about 2010? Well… As part of President Bush’s 2001 tax cuts, the estate tax was repealed for 2010, though it will be back in 2011 with higher rates and reduced exemptions. While Democrats promised to close the 2010 gap when they took control of Congress, they failed to reach an agreement. This means that the estate of anyone who dies in 2010 will pass completely untaxed to their heirs.

I mainly bring this up because the New York Times recently highlighted the case of a Texas billionaire who passed away this past spring. Because of the timing, his $9B estate completely escaped the estate tax. Had he died three months earlier, his estate would’ve been hit by the aforementioned 45% rate, and if he had lived into 2011, the rate would’ve increased to 55%.

The Senate Finance Committee is now trying to reinstate the estate tax for 2010, but it’s unclear whether or not such changes could be made retroactive to those who have already died in 2010. What do you think? Should Congress try to close this gap before the end of the year? If so, should they try to re-capture the lost estate taxes from earlier in 2010? Or should they leave well enough alone?

Published on June 28th, 2010 - 19 Comments
Filed under: Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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19 Responses to “Death and (No) Taxes: The 2010 Estate Tax Loophole”

  1. 1
    KellyC Says:

    “…What do you think? Should Congress try to close this gap before the end of the year? If so, should they try to re-capture the lost estate taxes from earlier in 2010? Or should they leave well enough alone? ”

    .
    .

    Interesting that ‘eliminating’ the estate-tax completely … did not readily occur to you.

    What is the constitutional and ethical basis for any estate-tax ?

    The estate-tax is really a “death tax”. Politicians somehow feel entitled to confiscate up to 55% of a citizen’s assets merely because he inevitably died.

    Those tax rates alone are outrageously high… but the tax itself is unjust from the getgo.

    It’s double and triple taxation. Americans already pay vast federal and state income taxes throughout their working lives. They pay income and capital gains taxes on money they save and invest. They pay local property taxes on their homes. They pay various sales taxes whenever they buy something. They even pay steep federal taxes on gasoline and telephone use. Yet after a lifetime of burdensome taxes, the death tax punishes Americans one last time simply because they worked hard, saved, and invested to pass something on to their families.

    In 2001 the House of Representatives debated an outright repeal of the estate tax. Political considerations – based on the false argument that the estate tax only applies to some imagined class of rich dynastic families – prevented the passage of an immediate full repeal. Instead, that slow ten-year phaseout bill passed in both the House and Senate. Incredibly, the Senate added a provision re-establishing the system in 2011… negating the whole purpose of an estate-tax phaseout.

    The estate-death-tax does not affect ‘only’ the rich.

    Many farmers, ranchers, and small business owners are hardly rich, but have built up valuable businesses they would like to pass on to their children. Yet when they die, their children rarely have the liquid cash needed to pay the death tax bill. Often the business must be sold or divided to raise money for the IRS. Many family farms across this country have been bought out by large corporations because of the estate tax.

    Ultimately, the argument against the death tax is a moral one. People should not be punished for working hard, saving, and building wealth. Our society should respect the most basic property right, namely the right to dispose of one’s property as one chooses.

    The American dream is based on making a better life for one’s children, despite the empty rhetoric of the class-warfare politicians in Washington. Building wealth is not sinister, it is admirable. Our tax rules should encourage the decidedly American virtue of saving for the future.

  2. 2
    MITBeta @ Don't Feed the Alligators Says:

    The real question is how many deaths so far this year have been “strategic” i.e. how many died on purpose to avoid the tax? Probably very few. If I were like to stage a strategic death I’d like to think I’d be inclined to wait until the last minute.

    I say reimpose it and make it retroactive, otherwise eliminate it altogether. Those are the only fair options.

  3. 3
    Rob Says:

    I think they just need to get rid of it completely. But at the least they should not reinstate it for this year. If congress couldn’t get its act together beforehand, why should they be able to now? The iRS does not give us a break if our tax return is filed late.

  4. 4
    Nickel Says:

    KellyC: Of course that occurred to me, but that option isn’t currently on the table.

  5. 5
    Home Tool Review Says:

    I guess it’s time to die. :)

  6. 6
    jim Says:

    I wouldn’t consider this a ‘loophole’. The term ‘loophole’ makes it sound as if its some sort of weakness or flaw in the bill that is being manipulated or exploited.

    Considering that estate taxes only impact multi millionaires I’m generally puzzled who so many people seem so vehemently outraged over it in principal. Why does this tax anger people so much?

  7. 7
    ZionistMovement Says:

    Screw the federal gov’t… The only thing they do for me is reduce the value of the monies that I’m paid in which in essence screws me and you. Don’t screw the little people US Gov’t because you do not know how to run a budget!!!

  8. 8
    Richard Says:

    Jim,

    KellyC very eloquently made the case for complete repeal of the estate tax. We should not punish people/families for death.

    If you want to change a financial legacy that is a horrible burden on our society, shorten copyright. The Gershwin family, for example, is making money in perpetuity for George & Ira’s work. They aren’t contributing at all.

    This is much more worthy of discussion than the family business killing estate tax.

  9. 9
    Dixon Says:

    I think a retroactive application of the estate tax is unconstitutional and immoral. Congress had a chance to act. It has been six months with no estate tax. People should not be held hostage by the government.

  10. 10
    Bob Says:

    I think the $1.5 exemption you showed for 2009 should be $3.5 exemption….not that it is now of any use.

    Note from Nickel: Yes, the exemption is (was) $3.5M. The 1.5 refers to the taxable amount at which you hit the max rate.

  11. 11
    Larry Says:

    I is bad enough that these idiots in congress pass bills without reading them. We don’t need them passing retroactive bills punishing people for death.

    If they could have passed a bill before Jan 1, 2009, I wouldn’t like it but at least people could make plans. The minimum exemption should be 10 mil then a max tax of 10%.

    The economy is hurting mainly because of all the uncertainty with what is going on in congress. This is yet another example of the problem.

    P.S. can you believe that they are trying to pass a banking reform bill with out addressing the cause of the problem, Freddie and Fanny as well as Barney Frank. Idiots.

  12. 12
    Lazo V Says:

    I’m not going to disagree with doing away with the tax completely.

    I don’t understand why the MOST taxed class in our country (namely the wealthy) not only pay the highest taxes in the country…but then, at death, have to pay a 45-55% tax on the assets they transfer to their heirs?!?!? They’ve paid taxes on it all their lives, and the heirs will pay taxes going forward…why isn’t that enough?!?!? (It is because Congress NEEDS the $$$!)

    While those in Congress are independently wealthy, 1.) they set the limits so they will not affect them or their families, and 2.) they have absolutely NO way to recoup the tax dollars they would lose by getting rid of the tax — Congress is money-hungry. Period. They’ve never borrowed a dollar they couldn’t spend 2x.

    I say do one of two things: 1.) get rid of the tax COMPLETELY, or 2.) APPLY IT TO EVERYONE. You die with $1,000 to your name = you owe the government $450. Oh, that’s not fair? Exactly.

  13. 13
    Susan M Says:

    Agree with Lazo, to this extent: we have paid taxes on all income and cap gains and our heirs will pay on any gain that accrues from their inheritance. That is enough, especially in this depressed economic environment, well it is depressed for the ‘little people’.

    What infuriates me is the mere suggestion that reinstating estate tax be made retroactive. How can we ever plan given a threat of retroactive taxation? If Congress can’t legislate in a timely fashion then that “opportunity” should be closed forever.

  14. 14
    Lazo V Says:

    Susan M: I absolutely agree with you on reinstating estate taxes — retroactive application is absolutely bogus.

    I consider my family a middle-class family. That said, I don’t feel any animosity with the wealthy. As a matter of fact, I hope someday to BE one of the wealthy. That, unfortunately, places me in the minority in this country. Many more want freebies.

  15. 15
    Don Says:

    Will the death of George Steinbrenner spur the Senate into action? Of course retrocative is likely unconstitutional.

  16. 16
    Jcnorheim Says:

    The fact is, the government plays a vital role in our country. If today every single government official were to be assassinated, and all of the property burned down, our country would go to pot.
    Now, it is important to point out that this country has the largest discrepancy between the average income and the richest of individuals of any country of any time period of the entire history of humankind.
    To put it simply, the vast majority of the money in this country is in the hands of the very richest. These people own millions of times the amount that their workers have. Are they really millions of times better? Would you trade the life of the millions of workers for the one insanely rich person? OBVIOUSLY NOT

  17. 17
    AngryJen Says:

    How can we pass anything to our children if the FAT FED takes half? My child would have to take a loan just to keep the house I spent 30 years paying for? Then, these MOONBATS think it only affects the rich who somehow owe it to the unemployed degenerates who want free housing, healthcare and foodstamps. I know a middle aged man who will not accept a job simply because it pays less than his unemployment. Wake up people, this is SOCIALISM! The more you give up to our bloated FEDERAL GOVERNMENT, the more they CONTROL us. Keep the power with the states, our forefathers would be ashamed of this “YES WE CAN” “VOTE FOR CHANGE”

  18. 18
    Claude Says:

    After an old farmer, like my dad,whom has given over half of his earned money to the government(city,county,state,and federal),over 70 years and then used the rest to buy groceries and pay for raising his children, I find it ridiculous that the Democrats would want to tax his remaining 50%, invested in land, by another 50%.
    That means that the government has already gotten 70% of everyone’s income that has actually worked during their life, This will only benefit the folks that sit on the porch all day and draw food stamps. Get A JOB.

  19. 19
    tracy Says:

    This is a not so bright question; how much in assets must a person have to be taxed in this category?

    What if you are in a trust and the home is under 500k and their is a mortage?

    I’m a newbie obviously, but it’s a start!
    Thank you kindly.

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