One of the big stories in the field of estate planning in 2010 was the temporary repeal of the estate tax due to the tax reform laws that were passed in 2001. This is the only year that the tax has not been levied since it was first introduced in 1916 and it is returning again in 2011, and from all indications it will continue on into perpetuity. In fact, there is even some talk in Congress about enacting legislation to impose the tax on the estates of those who died in 2010 retroactively. However, any such effort is likely to meet with some heavy resistance in court.
The federal government seems pretty certain that they have some sort of inherent right to impose this tax, but does it really make sense? First of all, let’s look at the rate of taxation. The top rate in 2009 was 45% and in 2011 it is scheduled to be 55%. By what logic can you support a tax that takes more than half of the assets that you have accumulated during your lifetime?
To many people this would be true even if the assets had never been taxed previously. But we pay taxes throughout our lives at every turn. Let’s say part of your estate is your house. You earned a paycheck that was taxed, and over a period of time you saved some of what was left for the down payment on your home. Those are after-tax funds. You then pay property tax all of your life. You are also subject to capital gains tax on the appreciation of your home. And then when you pass away, if your total assets exceed the exclusion amount, your estate and the home that comprises part of it will be taxed yet again at a rate as high as 55%.
Each of us has carried a tax burden all of our lives, and we are then required to give half of what’s left to the tax man. Most bright people can argue both sides of a debate if they choose to, but when it comes to the estate tax, it is difficult to find anything to support such an excessive and redundant levy.