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Estate Taxes: The Liberal Perspective

For those of you who have read any of my earlier posts, you know that I am an unapologetic conservative. However, I do respect other viewpoints. I get quite angry when people on “both sides” (as well as any other viewpoint) seek to demean those with whom they do not agree. I KNOW that I am right! However, I respect your right to voice your own, opinion and I will listen to it…although I may not agree. What I do not agree with are those people who need to spew vitriolic hatred and demeaning and degrading insults when they disagree with statements made by that “other side.” If you don’t agree, just say so! No need to berate me because I have a differing view. For example, Rush Limbaugh was recently criticized at length for his incendiary statements about Georgetown law student Sandra Fluke. What Mr. Limbaugh said was wrong (He called her names and berated her for testifying about the need to receive birth control from the government). Granted, I am sure he believed his statements and was ready to defend them and has done so, even though he feigned an apology to Ms. Fluke. That is part of his shtick. However, as has often been said, “If you can’t say something nice about someone, don’t say anything at all.” I would point out that what is good for the goose is good for the gander. Where was the same furor from Democrats and liberals over the various comments made about Michelle Bachmann and Sarah Palin? I recently heard a recording of a radio program where comedian Louis CK was the guest. His horrendous and hateful “monologue” on Sarah Palin and her Downs Syndrome son was outright deplorable! The Louis CK talk happened in 2008, during the last presidential election. He made fun of Mrs. Palin and used the “c” word many times when referring to her and made fun of her having to care for and raise a disabled child. Why didn’t this audio get national attention then? Where was the media and liberal outrage then? In that audio, the talk show host was even laughing along and agreeing with Mr. CK’s demeaning and vulgar portrayal of Mrs. Palin. I recently saw that Louis CK was invited to present his comedy routine at the Radio and Television Correspondents’ Dinner (He later pulled out from that event, after the 2008 audio came to light). Was the invitation to speak and “entertain” an affirmation of his “style” of comedy? Jimmy Fallon’s band director, Ahmir “Questlove” Thompson, played the song “Lyin’ As* *itch” when Michelle Bachman was introduced as a guest on Fallon’s show. Although both Fallon and Questlove publicly apologized to Rep. Bachman, Questlove’s statement was, “I feel bad if her feelings were hurt. That was not my intention.” One has to wonder, what WAS his intention? No word and no apology from Louis CK for his statements. I digress…

My topic today is to try to state, as fairly as possible, the liberal argument for an estate tax. I have read articles, blogs, and books about the estate tax and feel I have a good grasp on the subject. You might be surprised to know that I am not totally opposed to such a tax. Some of the main bases for the liberal argument comes from the writings of Adam Smith, who saw the main purpose for government as being to create a degree of civil order that enforced and protected natural rights which, as the Declaration of Independence states, were “life, liberty, and the pursuit of happiness” (i.e., property). Smith stated:

Civil Government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.

One blogger’s summation of this statement was, “To this end, Smith saw that those who had the most property to secure, were also those who most benefitted from the core function of government, and therefore those who should pay the most to maintain the very order they so much benefited from.” In other words, if you achieved the wealthy status that you did, and wanted to keep it, you need to provide funds to the government to help you protect and maintain that status. Taxes, such as the estate tax, according to the argument, are not a PENALTY for acquiring the wealth; they are the costs of maintaining and protecting it. Think about it: How many poor people do you see with a security detail? Yet, most celebrities, major business owners and other people of wealth pay large sums of money to maintain a security force to protect their assets and their family. Often where there is a natural disaster or some other catastrophe you see somewhat of a breakdown in society. People vandalize stores, taking everything they can. People vandalize and harm each other since, during such a catastrophe, law enforcement is often not available. Such a disaster is often a cue for some people to take what they can. Is it a majority of the population? Certainly not! However, when civil society breaks down, it is the wealthy who suffer the consequences. If I don’t have anything, then I don’t have to worry about vandals taking things from me. However, if I own real property that is destroyed by these mobs, I lose. If I am personally attacked and lose jewelry, clothing, vehicles or other articles, I lose. Therefore, it is in my best interest to pay to maintain a well-ordered society. Think about the “Occupy” movement. They loitered in parks and in buildings, destroying things. Did it cost them anything? No (other than those who were arrested). However, what were the costs to the cities where extra police and fire protection were needed? What about the cost of cleaning up after them? That bill fell on either the taxpayers or the property owners. More than likely, the “Occupiers” weren’t working and thus weren’t paying any taxes for those civil services to begin with.

Thomas Jefferson often expressed a concern about the rise of a permanent ruling class. Jefferson once said,

I hope that we crush… in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country.

Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.

The first statement is the reason for many of our existing laws to protect working class people.  Admittedly, many “big businesses” put profits in front of workers’ rights and such businesses must be monitored and contained. As the saying goes, “absolute power corrupts absolutely.” However, the same applies to government. The second statement from Jefferson is one of the bases for our current, progressive tax system. As you make more (or, in the case of estate taxes, have more), you pay a higher marginal rate. Presently, that maximum marginal estate tax rate is 35%. However, as of January 1, 2013, the highest marginal rate will return to 55% (where it was prior to 2010), unless Congress takes action. I was quite surprised that Congress acted in 2010 to increase the estate tax exemption and lower the maximum marginal tax rate. That change in the law – the Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 – was one of the last pieces of legislation of the 111th Congress controlled by the Democratic Party. Will the current Congress extend the current law, pass an entirely new one, or do nothing and let the current law expire? It should be noted that the estate tax exemption amount has NEVER gone down. When I started practicing law in the late 1970s, the federal estate tax exemption was $175,000. For many years, the exemption was $600,000. In 2002, the exemption was $1 million and in 2009, the last year of the Economic Growth and Tax Reconciliation Act of 2001 (the so-called “Bush tax cuts”), the exemption was $3.5 million. If you will recall from one of my earlier posts (“Not in my backyard!” July 3, 2011), I stated that most people don’t mind an estate tax… as long as they don’t have to pay it. Presently, people with estates between $1 million and $5 million don’t have to pay an estate tax. I would expect that, right now, they feel comfortable knowing their family will avoid that tax at their deaths. However, what if, as of January 1st, they have to deal with a tax of as much as 55% on their estate? Is it fair to say they should have planned for it, when an existing law which was allowing them to avoid such a tax simply disappeared because Congress wouldn’t act? And what if, as I describe below, the $5 million was needed to insure their financial security and keep from them relying on government assistance? Is there a problem with taxing that amount… again?

A few years ago, after I gave a talk on estate tax laws, I was approached by an attendee highly critical of my comment that Congress must regularly raise the estate tax exemption. His belief was that wealthy people should not be allowed to leave their estate to their children, because it then causes those children to be less productive. (NOTE: Isn’t that also the argument made by Conservatives and others for not extending unemployment benefits longer than 99 weeks? If we continually extend unemployment benefits, there is no incentive for the unemployed to find work. Again, I digress…) I then told him that if the wealthy cannot leave their estate to their children, then neither should be poor. I suggested to him that, using his argument, EVERYONE should be required to leave all of their assets at death to the government. He vehemently disagreed, because that would hurt poor people.

The various arguments and stories I have written above bring us all back to the same, basic question: What is an acceptable amount of wealth to retain? Clearly, that is a very subjective question! According to the U.S. Health and Human Services website, the 2012 federal poverty threshold for a family of four is $23,250 a year in income. President Obama has often used the figure of $250,000 as the start of his class of “wealthy” citizens. Of course, income does not always translate into wealth. I am sure we all know of individuals (professional athletes and other celebrities often come to mind) who earn a substantial amount of income and then, in less than a few years, are flat broke. I am also sure you know of individuals who were very successful in business for a while and then, due to either a downturn in the economy or other catastrophic event, they too went broke. Therefore, we cannot necessarily use income as the basis for determining wealth. A determination of wealth should be based on net asset worth. Using the 2007 Survey of Consumer Finances as a basis, the median net worth of a “baby boomer”, ages 55-64 was $253,000 and the mean net worth was $930,000. Of course, since 2007, the stock market has crashed and many private investments are substantially lower than they were in 2007. Yet, wouldn’t you consider someone worth $930,000 (almost a millionaire!) to be wealthy? Let’s consider what could be done with a $930,000 cash investment today. If you were to invest it in a certificate of deposit, what rate could it earn? Assuming you could make three percent, which would generate $27,900 a year, before taxes. $27,900 of income is only $4,650 more than the federal poverty threshold. A quick search online shows that the rates for a one year CD around the country range from .15% to 1.15%. Not even close to three percent! Of course, the federal 30-year Treasury note yield is 3.22%. Still, that only generates $29,946 a year in income. (Are you still interested in seeing the estate tax exemption amount fall back to $1 million?)

Let’s say that a person could make six percent (6%) on their investments. They would need to have $4,167,000 of assets earning 6% -- risk free – to be able to be assured of a $250,000 annual income before taxes. However, based on current rates and assuming one would consider the 30 year Treasury yield to be viable and secure, $4,167,000 would only generate $134,177.40 a year at the current yield of 3.22%. Of course, by only using the income, the individual is preserving the $4,167,000 to pass on to his or her family. That is apparently something the individual I mentioned above, as well as many liberals, consider “taboo.” Well, what if we amortized the net worth? In that way, an individual is receiving both income and principal from his or her net worth so that the net worth decreases over time and, if they live to their normal life expectancy, they will die without a penny to their name, not leave anything to their children (who must then generate their own wealth). Of course, for the person’s own sake, let’s hope they don’t outlive their money or have a catastrophic financial emergency somewhere along the line! If that happens, I wonder who will take care of them? Gosh!  It sure would be nice if they could maintain some sort of “safety net”, right? Nevertheless, if we use a 6% interest rate, a person would need just over $2,660,000 to maintain an income of $250,000 a year, if the person was seventy years old. This assumes, based on a normal life expectancy, that the person would live 17 more years (the life expectancy for a 70-year old male is 13.73 years, and for a 70-year old female it is 17 years). The same person would need to have accumulated more than $3,250,000, based on achieving a 3.22% investment rate, to be able to maintain $250,000 a year. In each scenario, all of their saved money would be completely used up in 17 years, based on the person receiving $250,000 a year.

My father worked in civil service his entire life. He was a hard worker and was very prudent with his money. I never remembered him having a credit card. He maintained a savings account and CDs. In his later years, I got him to be interested in investing in insured corporate bonds, just to obtain a better interest rate than CDs were paying. However, he was not a risk taker. The only debt he ever had was a home mortgage. He paid it off early. When my mother was in a nursing home, he paid for her care from his income and savings. He never looked to me or anyone else for financial help. He was generous! He gave to his church and other community activities. He made gifts to me and to his grandchildren. In other words, he was financially independent. All in all, I never remember him having more than a few hundred thousand dollars in savings. When he retired in 1975, his government salary was around $18,000 a year. Yet, when he died in 2006, his government pension was nearly $43,000 a year. In other words, because of his career choice of working for the government, he really didn’t have to save for his own retirement. He was provided for through the government. As a result, his concept of “financial security” was MUCH different than mine. I have been self-employed for most all of my career. If I retire, I have no guaranteed income. If I retire, all I have is what I have saved and possibly Social Security. However, we are all being told that the Social Security system is insolvent and will not last. Yet, Congress just extended the reduction in payroll taxes.(How, again, are we all going to “fix” the Social Security system so that it can continue when we are “shorting” the contributions to it?)

I’d prefer to not have to rely on my government to take care of me in my later years. I have been, and will continue, saving for my retirement. Of course, it would be great if the economy would improve so that my investments would do better. However, I will continue to hopefully work until I attain the level of savings that will guarantee my financial security. I’d prefer those savings to be at a level that would allow me to only use the income for the remainder of my life and that of my wife. However, I am realistic enough to know that may not be possible, depending on my health and my income needs. When I was young and my father was earning $18,000 a year, we lived comfortably. Now, $18,000 is well below what is considered the MINIMUM amount needed just to survive. My father told me about his father crying because he could not come up with $300, in the early 1920s, to purchase a house and three acres of land in Pennsylvania. The same land is probably worth nearly $1 million today. Therefore, if I plan my retirement based on wanting to make $250,000 a year, because that will keep me and my wife comfortable (NOTE: That is not the figure upon which I am planning. I am simply using that income figure since it is what our President considers the threshold of wealth), then what happens if the cost of living increases to a point where $250,000 a year doesn’t allow me to continue my style of living? Do I turn to my children for help? Oh, wait!  They will be busy trying to generate their own “nest egg” so they can retire. Of course, if they have to factor in additional funds to take care of their parents, that means I really should refigure my entire plan above to include those sorts of financial emergencies as well. For example, what if one of my children has a catastrophic medical need? What if one of them has a substantial financial problem? I’d like to be able to help them. However, if I am relegated to only providing enough so that I can pay my own income for my normal life expectancy, then I guess I just can’t help my children.

Financial security. What is it? Is it also subjective? Of course it is! Someone who now makes $50,000 a year doesn’t need to plan on earning $250,000 a year in retirement. In fact, the rule-of-thumb is that you usually need 75% to 80% of your regular income in retirement. Therefore, someone who earns $250,000 a year while working, possibly only needs $187,500 in retirement. Someone earning $50,000 a year might only need $37,500 in retirement. However, the amount needed in retirement will also possibly increase if there are health needs, inflation, or other changes. The needs will vary depending on the health, lifestyle, needs and wants of the individual. I know of people who spend every weekend at their lake house. I know of people who spend every summer in Europe. I don’t have (or want) a lake house. Although I like Europe, I don’t necessarily want to spend every summer there. For some, a “lavish” vacation is a trip to Branson, Missouri, or Las Vegas, Nevada. For others, it is a cruise. For others, it is a week in Cancun. The “lavishness” is also subjective and depends on the availability of funds, as well as upon the desires of the person.

Financial security generally pertains to me having enough to care for myself. It typically does not include me leaving an inheritance to my children. I have seen senior citizens struggle and deny their own comfort just so they will have something to leave to their children. That is both a badge of pride for them, as well as love for their family. I, too, would like to leave something to my children when I die. It is not a matter of pride. It is a matter of being ready for emergencies – both in my life and in theirs – and being able to maintain financial security, should the cost of living rise. Does that mean I need an unlimited amount of wealth? No. Based on my examples above, $5 million would be a sufficient amount of money for me to live comfortably for the rest of my life and possibly be able to pass along some of it to my children. Would I like to have more? Sure! Will I necessarily need more? Probably not, unless things change drastically. If I die with $5 million to my name, do I want to pass it on to my children? Yes. Would I like to help charitable organizations? Sure! If I gave 20% to charity ($1 million), that would leave $4 million to be divided between my children. Will $2 million leave them financially secure? I refer you to my discussion above about my father earning $18,000 a year and living comfortably. What will housing cost in forty or fifty years when my children want to retire? What will groceries, fuel, clothing, and educations cost then for them and their children and grandchildren? In essence, although I would love to leave $2 million each to my children, which inheritance will not necessarily guarantee them financial security? Nevertheless, I’d like the opportunity to leave it to them. What if I died with $10 million to my name? Well, I can assure you I would be quite comfortable in my old age (NOTE: I intend to live to be 150!), benefit my community and charities, and I could leave a larger inheritance to my children.

I often ask clients how much is too much to leave to their children. The amount varies. However, in the above scenario, if I died with $10 million, left 20% ($2 million) to charity and then left each of my children $4 million, I would have basically provided for both my financial security and theirs. Could they then just “slack off” and just try to get by until dad dies and makes them rich? Sure. Could I provide more for them during my lifetime so that they would not have to work? Sure I could. Personally, I wouldn’t do that because I want to help them be productive. I don’t want them to be lazy, spoiled, and unappreciative of the value of a dollar. Others may not feel that way. Regardless, the current federal law allows me to leave up to $5 million to my family and other beneficiaries without an estate tax. I am comfortable with that. The current law is also indexed for inflation so that, over time, that $5 million exemption will increase. However, the current law also expires December 31st of this year. As of January 1, 2013, the federal estate tax exemption will be $1 million and the maximum marginal tax rate increases from 35% to 55%. That means that if I die next year with that same $5 million estate, my family will pay $2,045,000 in estate taxes. That will still leave $2,955,000 to be distributed to my children (or, in the above scenario, I can still leave $1 million to charity and then have a $4 million taxable estate, paying  $1,495,000 in estate taxes and leaving $2,505,000 to be divided between my children). The “rub”, as I see it, is that I accumulated the $5 million through my hard work and determination. I paid taxes on it as I acquired it. I paid taxes on what it earned. I needed it to generate my own income so as not to be a burden or charge on the government. Now, with my death, I have to (or my family has to) pay taxes on it again. If our President recognizes a “wealthy” person as one making $250,000 a year and he pledges not to raise taxes on those earning that amount or less, then that tax pledge must extend to the estate tax. In other words, if he defines one earning $250,000 a year or more as “wealthy”, then he must also define one with less than $4,167,000 as not being “wealthy” since that person is using his assets to earn $250,000 a year.

What’s the solution? There is no easy answer. I again would point out that the federal estate tax exemption has never gone down. Therefore, we should urge Congress to maintain the $5 million current exemption and continue to index it for inflation. The federal estate tax generates only around one to two percent of all federal revenue. Thus, its impact on government is minimal. However, its impact on a family is often devastating. When assets have to be sold to pay that tax, families lose. They lose assets that were acquired through hard work and compliance with laws, including laws mandating the payment of taxes. Enough is enough! If I am successful, allow me to realize that success. Success is not evil. Jealousy is! However – more importantly – allow me to retain enough of my success to protect myself and my family. Is that too much to ask?

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