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Friday, February 5, 2010

Senate to Consider Estate Tax Prepayment at Lower Rate

Wall Street Journal, Estate Tax Prepayment Option Eyed to Break Logjam in Senate, by Martin Vaughan:

A proposal to allow wealthy people to prepay estate taxes while they are still alive, in exchange for a lower tax rate, has caught the attention of Senate staff trying to craft a bipartisan, permanent compromise on the estate tax.

The estate tax prepayment idea is being pushed by Sen. Maria Cantwell (D., Wash.) as a possible compromise between senators who want a permanent, 35% estate tax rate and the position of President Barack Obama, who supports a 45% rate on inherited wealth. ...

The plan would allow wealthy people to place assets in a prepayment trust while they are still alive. Those assets would be subject to a 35% tax, which the estate owner would have five years to pay, according to a document describing the plan, obtained by Dow Jones Newswires. ... [T]he measure could be expected to have a net positive effect on revenue over the next 10 years to the extent that wealthy families begin to prepay taxes to take advantage of the lower rate.

Update: Tax Update Blog:

Actually, the just-expired tax law already has a provision that pretty much does that. It's called the gift tax. The tax cost of gifting assets is lower than that of passing them on at death because the gift tax rate is imposed only on assets that reach the next generation; the estate tax is imposed on the whole estate, including the amount that has to go to the government to pay the tax. Sure, you have to give assets away to qualify for the gift tax, but that's just a detail.

In real life, relatively few people make taxable gifts, even when it means estate tax savings. It's unlikely that Senator Cantwell's deemed death provision would be much more popular.

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Comments

Interesting. Are they thinking about a gross up if within 3 years of death ala 2035? I doubt if they got that far.

Posted by: Bill | Feb 5, 2010 11:34:55 AM

isn't the gift tax in itself a discounted prepayment of estate tax? now we want to increase the incentive?

Posted by: r. | Feb 5, 2010 1:39:39 PM

There is an added tax benefits in states like Washington that don't have a gift tax, but do have a state estate tax.

Posted by: Derek W. Jensen | Feb 5, 2010 5:02:04 PM

I got a better idea. Before you die(assuming you have any assets left) cash in every thing you have, pay no taxes, hide it(give map to heirs) and tell the feds to piss off.

Posted by: robertsgt40 | Feb 5, 2010 5:23:41 PM

Reducing the estate tax to 35% with a $5,000,000 exemption indexed for inflation can turn into a much friendlier tax. Some ideas are as follows:

*Issuance of Bureau of Public Debt Bonds that can be redeemed as estate tax payments like the "Flour Bonds" that were issued until 1971;

*Exempt pension related accounts that continue to pay income taxes;

*Purchasing life insurance policies that will be owned by the Bureau of Public Debt, but held in trust with the costs paid by the insured. Upon the insured's passing all proceeds get paid directly to the Bureau of Public Debt and accordingly credited against towards the estate tax liability.

Any responses would be appreciated.

Posted by: Paul Bell | Feb 6, 2010 2:43:49 PM