Paul L. Caron

Wednesday, June 9, 2010

Texan May be First Billionaire in 95 Years to Pass Estate to His Children Tax-Free

In my lecture, The Costs of Estate Tax Dithering, 43 Creighton L. Rev. ___ (2010), I talked about how the estates of several recently departed celebrities -- including Texas tycoon Dan Duncan -- might be treated in the current estate tax interregnum. The New York Times has an interesting article on Mr. Duncan, Legacy for One Billionaire: Death, but No Taxes:

A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.

Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury. ...

The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth — until Jan. 1 of this year, it applied to any estate valued at more than $3.5 million, taxing only the money exceeding that threshold, or $7 million for a couple’s estate. ...

Many lawyers say Mr. Duncan’s heirs have the means and motivation to wage a fierce court battle to challenge the constitutionality of any retroactive tax. ...

Advocates of the tax say it is unconscionable that Congressional leaders have allowed the richest Americans to reap a new tax break at a time when deficits are soaring and the income gap between wealthy and poor citizens remains near historic levels.

(Hat Tip: Ann Murphy.)

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This country does not as yet have a wealth tax. And the new communist (democratic) party notwithstanding,it won't.

Posted by: Heather | Jun 15, 2010 11:53:36 PM

One question that has not been posed and with all due respect to Mr Duncan, do any of Mr Duncan's heirs need to add any additional devisees in their personal wills ? I might be available.

Posted by: Getinline | Jun 10, 2010 1:14:30 PM

"This country does not as yet have a wealth tax. And the new communist (democratic) party notwithstanding, it won't."

The estate tax isn't a wealth tax; it's an excise upon the transfer of property at death, just as the gift tax is an excise upon a transfer of property during lifetime.

Posted by: guy helvering | Jun 10, 2010 12:57:19 PM

The heirs have until the 1st of October to whistle past the grave yard. After that Congress will not be able to retroactively tax the estate.

""Once the money has been earned and taxed, it's wrong to tax it again because someone wants to leave it to his kids."
But the appreciation in Mr. Duncan's assets was never taxed.
Posted by: guy helvering | Jun 9, 2010 11:26:33 AM"

This country does not as yet have a wealth tax. And the new communist (democratic) party notwithstanding, it won't.

Posted by: JDinCPAfirm | Jun 10, 2010 12:11:04 AM: You would have a point if the gifted funds were pre-tax and had not been subject to income taxes while the decedent was still alive. The descendants will pay taxes on the income the inherited wealth produces. If the act of transference were to be consider income as you propose you would pretty much kill the economy. Every transfer would be an income to the transferee. Your kids college education that as a parent you paid for would be an income to the child. The money you spent paying your wife's bills (like her student loans) would be an income to her. If you were to pay some of your parents bills it would be an income to them. If the tax code isn't complex enough as it is, one can imagine every possible permutation of what can be consider income to a transferee and the enormous problem for congress, the relevant agencies and the courts in deciding which transfer is taxable and which isn't.

Posted by: cubanbob | Jun 10, 2010 9:58:11 AM

I suspect the namby-pamby Congress, afreaid of a court battle, will split the difference and go with reported efforts to give estates the option in 2009 to follow 2009 estate tax law or 2010's absence of the levy and then finally come up with something very close to 2009's provisions for 2011.

Posted by: Kay | Jun 10, 2010 8:46:40 AM

It seems some posters have missed the point I was trying to make -- namely, that the argument that the estate tax taxes value that's already been taxed is invalid to the extent the estate has unrealized appreciation. Whether death should be the occasion for imposing a tax on the unrealized value is an entirely different issue.

Posted by: guy helvering | Jun 10, 2010 8:15:38 AM

The more publicity, the more likely there will be a retroactive tax fix.

Posted by: mike livingston | Jun 10, 2010 6:59:21 AM

"But the appreciation in Mr. Duncan's assets was never taxed."

The gain also hasn't been realized yet. It is still in the business he created. One big issue with the tax is that people are forced to sell the asset (like a farm or small business) in order to pay the tax.

The Death Tax was initiated when the income tax was established, as a short term fix to retroactively tax estates that hadn't paid any income tax. It would go away in a few years......except it didn't. Taxes never do. Funny, that.

Posted by: Yompkee | Jun 10, 2010 6:48:42 AM

Do the heirs get a stepped up basis in the assets or is this really a deferral of tax?

Posted by: Boaz | Jun 9, 2010 10:12:51 PM

I consider myself pretty conservative, but in framing the issue, forget for a minute that the money was transferred to the decedent's lineal descendents. Assume that the facts are simply that one taxpayer transferred $1B in assets, as a gift, to a collection of taxpayers. In this case, regardless of whether the recipient taxpayers were corporations, partnerships, or individuals, such recipient taxpayers would have received "income from whatever source derived." (16th Amendment; see also section 61(a)(14).) Thus, under federal tax principles, the general rule is that income is taxed except where specifically excluded. (Cf. section 118 for corporations.) Although Congress has developed a special set of rules in the event of death (i.e., estate, gift, generation-skipping taxes), I see no miscarriage of justice by taxing, in some manner, a transfer of economic value from one taxpayer to another, generally without regard of the circumstances. In my mind, to promote the end of the 'death tax' is to promote a policy of nepotism.

Posted by: JDinCPAfirm | Jun 9, 2010 9:11:04 PM

"But the appreciation in Mr. Duncan's assets was never taxed."

Under current law those that inherent Mr. Duncan's estate will take a transferred basis and therefore the appreciation will be taxed upon disposition (there is some stepped up basis allowed but in the case of Mr. Duncan most of the estate will be taxed on disposition)
There will be one level of tax as it should be and not two

Posted by: tf | Jun 9, 2010 5:31:49 PM

Fortune - September 4, 2000

The Estate Tax Is One Death Penalty Too Many

By N. Gregory Mankiw, Economics professor at Harvard and the author of Principles of Economics.

Posted by: Woody | Jun 9, 2010 4:41:52 PM

Taxing unrealized appreciation reminds me of big-government advocates' ideas to tax unrealized appreciation of people's homes - when homes used to appreciate. That's wrong. The same assets in estates are also taxed more than once when passed from one generation to the next. That's wrong.

There are many arguments against the estate tax besides how, when, and how many times estate assets are taxed. It punishes success, investments, and families. The justification used for pushing the tax is simply to take money from individuals and give it to the government - plus, it appeals to wealth-envy people who want to "spread the wealth" because they don't have "their share." That also makes the estate tax wrong, too - morally wrong.

But, you can have your own opinion on the tax. I was mainly mentioning that the NYT doesn't get it right. I'm not alone.

New York Times Gets it Wrong on Death Tax

Posted by: Woody | Jun 9, 2010 4:36:18 PM

The appreciation will be taxed when his children sell the property (should they decide to do so).

Posted by: tax dude | Jun 9, 2010 2:01:40 PM

Anything to keep the american democracy, er...plutocracy going...

Posted by: LoserCPA | Jun 9, 2010 9:57:37 AM

"Once the money has been earned and taxed, it's wrong to tax it again because someone wants to leave it to his kids."

But the appreciation in Mr. Duncan's assets was never taxed.

Posted by: guy helvering | Jun 9, 2010 8:26:33 AM

Oh, wait. Who is "to blame" for this? Here's part of the NYT article not provided above: "The one-year lapse in the estate tax was signed into law by President George W. Bush in 2001....

Yep. Blame Bush. It doesn't matter that Bush believed that the estate tax was wrong and wanted it ended for everyone without an expiration. It doesn't matter that the flawed one-year extension was necessitated by original demands by the Democrats for an expiration in order to obtain their votes, the delays of a Democratic Congress to deal with the impending expiration, and passed by a Congress with a Democratic majority (never mentioned in these cases.) Since this guy was a rich, white Texan, then Bush had to be in on some scheme to help him.

I'm glad that the estate didn't have to pay the tax. No estate should. Once the money has been earned and taxed, it's wrong to tax it again because someone wants to leave it to his kids. And, Bush didn't make me feel this way, so don't blame him for that.

Posted by: Woody | Jun 9, 2010 7:30:39 AM