Estate Tax Stupidity

[MonkeyMama]

Just to be clear - I am well aware of the 2011 reset. I just was not aware of any new legislation (because there isn't any). It is highly unlikely that Congress will allow the current Estate tax threshholds, to expire. IT might not be nailed down until December 31, 2011, but Congress has been pretty clear that they intend to increase the $1 million estate tax figure. (I admit, who knows, though. They've waffled on this quite a bit over the course of this year).

Also, to be clear, just because one has $1 million in assets, does not mean they are subject to any Estate taxes. It's not like 55% of every dollar over $1 million goes to Estate tax. As with all taxes, it is far more complex than it is made out to be. I stated only a small percentage would be subject to the estate tax. I did not say that only a small percentage would have $1 million in assets.

CPTACEK - Actually, it is a tax that affects the uber wealthy. Even if they can get out of some of it, they will likely pay some taxes. But, I think your point is VERY valid. While the Estate tax only affects 0.3% of the population at current (maybe 1.75% if we go back to the $1 mil threshhold?), it also accounts for an extremely small percentage of Federal tax revenue. So what is the point of it? Good question. I can guarantee it benefits accountants and lawyers. The proverbial "death and taxes," rolled into one.

[dfeucht]

CPTACEK - Actually, it is a tax that affects the uber wealthy. Even if they can get out of some of it, they will likely pay some taxes. But, I think your point is VERY valid. While the Estate tax only affects 0.3% of the population at current (maybe 1.75% if we go back to the $1 mil threshhold?), it also accounts for an extremely small percentage of Federal tax revenue. So what is the point of it? Good question. I can guarantee it benefits accountants and lawyers. The proverbial "death and taxes," rolled into one.

I wonder what percentage of revenue it is and how income tax rates would have to change to cover it if we took it away? I do remember a few years back that quarterly tax revenue in the state of Minnesota was noticeably higher one quarter because one or two wealthy people happened to have passed away and settled their estate. I thought that was pretty interesting that it could be noticed like that in state revenues.

[disneysteve]

If you make 12% on Mutual funds for 30 years

I think you'll have a tough time finding many funds that have an average annual return of 12% or more over a 30 year period. And even if you could find some that have done it in the past, that is no guarantee that they will continue to do so for the next 30 years.

I just checked Vanguard, one of the leaders in the industry. They have exactly 4 funds with since inception returns of 12% or more. The oldest have been in existence since 1984, so 26 years.

[cptacek]

If the exemption is still $1mil in 30 years, something is terribly wrong.

It is indexed just like the AMT. That is, it isn't. As the value of the dollar falls, as it does pretty much every year, $1 million will start to ensnare more and more people.

[littleroc02us]

I think you'll have a tough time finding many funds that have an average annual return of 12% or more over a 30 year period. And even if you could find some that have done it in the past, that is no guarantee that they will continue to do so for the next 30 years.

I just checked Vanguard, one of the leaders in the industry. They have exactly 4 funds with since inception returns of 12% or more. The oldest have been in existence since 1984, so 26 years.

If you don't believe that is possible, lets take 10% (The Wesley Income has had this type of return since its inception in 1970)for example which would be 991k which if double for both my wife and I would be 1.98 million tax free. (Tax free means everything) Let's say you don't believe the 10% idea also, lets try 8%. If you were to take either Vanguard Total market index fund (This is what I have) and the Wellington fund which has averaged 8% that since it's inception and invest that for 30 years than your investment would turn into 662k, which if double with both of our accounts to 1.32 million. All tax free unlike my 401k. I figure 2 million is a pretty good figure to shoot for retirement with.

[disneysteve]

If you don't believe that is possible, lets take 10% (The Wesley Income has had this type of return since its inception in 1970)for example which would be 991k which if double for both my wife and I would be 1.98 million tax free. (Tax free means everything) Let's say you don't believe the 10% idea also, lets try 8%. If you were to take either Vanguard Total market index fund (This is what I have) and the Wellington fund which has averaged 8% that since it's inception and invest that for 30 years than your investment would turn into 662k, which if double with both of our accounts to 1.32 million. All tax free unlike my 401k. I figure 2 million is a pretty good figure to shoot for retirement with.

I wasn't debating your theory, just the 12% illustration. Certainly, investing $5,000/year for 30 years should get you over half a million for sure. And that would mean only investing from age 35 to 65. If you start saving earlier, which you should, you could have 35 or 40 years of growth.

The debate from others, though, is that you are using future numbers to illustrate past savers and that doesn't work. Why not? First, as Joan pointed out, Roths have only been around for 13 years. Second, the contribution limit was $2,000 for many of those years, not $5,000. So someone who is 65 today didn't have the same investment opportunity that you and I do now. You also have to remember that $1 million 30 years from now won't be worth as much as $1 million today. Of course, the Roth contribution will hopefully rise over time so that we'll be able to put in more than $5,000 in future years.

[littleroc02us]

You also have to remember that $1 million 30 years from now won't be worth as much as $1 million today. Of course, the Roth contribution will hopefully rise over time so that we'll be able to put in more than $5,000 in future years.

Again that it why I stated earlier in my post that you have to adjust for inflation by using the common 12/4/8 rule. That is what many professionals use to figure inflation. 12% interests/4% inflation/ 8% return. You can adjust this figure based on the facts it's just helps you to have an idea. No body knows what will change or what the value of anything will be 30 years from now. All you can do is plan the best you can for your family. Sitting around and saying "No" to everything gets you nowhere.

[scfr]

News about the estate tax is something I always pay attention to, and I also have not heard any news about new legislation. I read the WSJ daily ... Believe me, when there are developments on the estate tax, they will print it!!!

A couple points to consider: If you are talking about a married couple, while I don't know about what happens in non-community-property states, in CP states a person's estate is half of the couple's combined assets.

If your spouse is a US citizen, they get a "spousal exemption" on the estate tax. So, if a woman dies with an estate of $5 mill and leaves all of it to her citizen husband, he does NOT pay any estate tax.

HOWEVER, if your spouse is NOT a US citizen (which is true in my household), there is NO spousal exemption. This is something that lots of folks where there is one partner who is not a citizen are not aware of, and it pains me.

For a couple to have a combined estate of over $2 million is not really that outrageous. We're not just talking about cash in the bank. We're talking about EVERYTHING they own. Imagine a couple that has just retired, when most of us will be at the very peak in terms of how much savings we have. They have a paid-for house that is worth $600K. They have 2 cars, a
"toy" or 2 (boat, motorcycle, whatever) and household possessions that are worth $200K combined. If they have $1.2million or more in retirement and other savings, then they are over the $2 million threshold.

Throw in a business or a rental property or two, and you can see how easy it is to be pushed in to the category of those that have to pay estate taxes, even if you are NOT "uber rich" but merely someone who has worked hard and saved. How many times have we seen people on this forum say they plan to have $2-3mill in savings at retirement? Plenty.

Personally, I find it ridiculous that someone in this situation has to spend a huge amount of money on legal fees to set up bypass trusts, etc.

P.S. - And if I haven't convinced you yet, think back to the last real estate bubble. Imagine a couple in a HCOLA that had purchased a modest house in an area that turned out to be "red hot" and due to the passage of time & the housing bubble had ballooned up in value to close to $1mill. If the US citizen spouse died at age 65, should the surviving non-citizen spouse be forced to either dip in to retirement savings or sell the house to pay the estate taxes?

[TrunkMonkey]

Just to be clear - I am well aware of the 2011 reset. I just was not aware of any new legislation (because there isn't any). It is highly unlikely that Congress will allow the current Estate tax threshholds, to expire. IT might not be nailed down until December 31, 2011, but Congress has been pretty clear that they intend to increase the $1 million estate tax figure. (I admit, who knows, though. They've waffled on this quite a bit over the course of this year).

Also, to be clear, just because one has $1 million in assets, does not mean they are subject to any Estate taxes. It's not like 55% of every dollar over $1 million goes to Estate tax. As with all taxes, it is far more complex than it is made out to be. I stated only a small percentage would be subject to the estate tax. I did not say that only a small percentage would have $1 million in assets.

CPTACEK - Actually, it is a tax that affects the uber wealthy. Even if they can get out of some of it, they will likely pay some taxes. But, I think your point is VERY valid. While the Estate tax only affects 0.3% of the population at current (maybe 1.75% if we go back to the $1 mil threshhold?), it also accounts for an extremely small percentage of Federal tax revenue. So what is the point of it? Good question. I can guarantee it benefits accountants and lawyers. The proverbial "death and taxes," rolled into one.

I'm not sure where you get 0.3% of estates will pay the estate tax.

The percentage of households with >1million of investable assets, money in addition to their primary residence is about 7%. So at least 7% of households would be subject to the estate tax if they died with their current level of assets.

Millionaire - Wikipedia, the free encyclopedia

The estate tax can be reduced by using life insurance, this is one of the most common things to do, that is why Universal Life exists.

You might minimize the tax but there is no way to get around a 55% tax completely.