THE GOLDEN RULE AND THE MOVE TO REPEAL THE SO-CALLED "DEATH TAX"

We've all heard that the only certainties in life are death and taxes. So it should come as no surprise that when you put the two together -- particularly in an election year -- you also get politics. Such is the strange alchemy behind the recent move to repeal what has been termed the "death tax."

I. Leading Questions, Loaded Terms

First, a word about the phrase "death tax." It is simply another example of rephrasing an issue to elicit a desired response. Inventing new phraseologies in this way can really help your poll numbers for, as we all know, the words we choose to frame an issue can profoundly affect public opinion. A couple of examples:

17. Are you in favor of handing out jobs and promotions to unqualified people just because they happen to be a member of some special group?

17. Do you support the idea of giving some small extra consideration, among the variety of extra considerations given, to qualified applicants who are members of groups that have suffered historical discrimination?

Or think about your answer to:

17. Do you think Al Gore has the personality of a plant?

Versus:

17. Do you think Al Gore's intellect and serious-minded approach might be a welcome change in government?

II. "Are You In Favor of Death, Sir?"

Now, when it comes to the issue of the estate tax, the suggestive approach tends to run as follows:

17. Do you think it's fair that people should be taxed just because they die?

Unsurprisingly (dying, bad; taxes, bad), most people don't much like that concept and tend to reply in the negative. (Not that such taxes directly impact them; after all, they're not dead.)

Of course, the same issue could be presented another way:

17. Do you have any problem with the notion of the richest one or two percent of the population paying some amount in order to transfer their enormous wealth down to another generation?

That may garner a different response.

As with many political issues, there are facts as well as undercurrents that are never addressed when an issue is reduced merely to a suggestive phrase. In fact, the tax at issue is not so much a "death tax" as it is a transfer tax. It applies mostly to transfers to another generation. Some of the realities behind the "death tax" include:

Fact #1: Each person receives an estate and gift tax credit which will, under current law, equate to an exemption from the estate tax in amounts scheduled to go up to $1,000,000 by the year 2006.

Fact #3: With a bit of not terribly complex (although, due to lawyers' rates, a tad pricey) planning, it's possible to double the amount to be left to the next generation without any tax consequence.

How? Assume a family is composed of Mom, Dad, and two children. When Mom dies, the children can become beneficiaries of a trust up to the amount of Mom's tax exemption ($1,000,000; recall Fact #1). Dad gets the rest, and as Mom's spouse (remember Fact #2), pays no tax on the transfer. No tax for kids, plus no tax for Dad, equals no tax, period. And the trust for the children can be set up so that Dad can have access if needed. What happens when Dad dies? Well, he uses his exemption to pass on another $1,000,000 without tax.

With this clever planning, the family has solved any "death tax" problems it might otherwise have faced. (Actually, it occurs to me that it's not really a "tax problem" when you have so much money that you might pay some taxes. It's a "tax project." A "tax problem" is making a relatively small income and paying a good portion of it away in taxes; but that's another story.)

Fact #4: Through lifetime gift giving, the taxable estate can be reduced as well. Any individual can give up to $10,000 per year per donee without any tax bite or any use of the tax credit.

For example, assume Mom has survived Dad and has a moderately large estate. She also has three married children, who each have three children. She's got fifteen possible donees (children, plus sons-in-law and daughters-in law, plus grandchildren), so she can reduce the estate by $150,000 per year, tax free, through gifts. In this manner, moderately large estates -- which might otherwise be subject to estate taxes -- can avoid or greatly reduce taxes.

Fact #5: Recall that through smart family planning (as explained in Fact #3), descendants can receive at least $2,000,000 without any tax, so if there is tax to be paid they are already receiving more than $2,000,000. The fact that they are from wealthy families, and are most likely already middle-aged (and likely with adult children of their own) when their parents die, means they are probably secure financially.

This is not an unimportant consideration. I seem to recall some political talk about how individuals should earn what they receive. I wasn't aware that meant you deserve a windfall because you picked rich parents.

Fact #6: Assets in an estate receive a "stepped up" basis at the time of death. This means that stock that was purchased for $10, but that is now valued at $100, passes to the heirs with a value, for tax purposes, of $100 -- not $10. As a result, if the stock is sold, there is no capital gain and no tax, despite the fact that the actual gain received on the stock was $90 (so that the capital gain should arguably be $90 too). This stepped-up basis feature of the tax code tends to negate part of the argument that estates get taxed twice, once when earned and once again at death.

III. The Golden Rule

Who pays this tax? Rich people.

Who makes big campaign contributions? Rich people.

Just a thought.

This is also a problem for charities, since they receive so many of their dollars from rich people. While they're worried that the repeal of the estate tax would hurt charitable contributions (such contributions are a way to reduce the tax), they're in the same bind as the politicians: not wanting to offend rich people.

Death, taxes and politics. Looks like the "golden rule"; those with the gold make the rules.