Saturday, December 1, 2012

A Tax To Die For...Here I briefly explain another "Fiscal Cliff" tax issue: The Estate ("Death") Tax...

One of the least talked about aspects of the "fiscal cliff" is the Estate Tax, sometimes referred to as the "Death Tax".  It is the Federal Tax owed on the value of a what someone leaves behind to their heirs.  Here is how it works, in its simplest terms.

See the graphic below (the left hand potion of the graphic) for the tax rate as it is now, as it might be if the "Bush Tax Cuts" expire and what the President would like it to be. 

You can see the tax rates expressed as a percentage and the amount that is EXEMPT from the tax in BOLD.  Any estate with an assessed value UNDER these threshold amounts would not be subject to the estate tax at all.

Example: at the "Current Policy" if an estate is valued at $6.12 million the first $5.12 million is exempt from taxation, but the Estate Tax would claim 35% of the remaining $1 million---$350,000 tax due.

Under Obama's Policy $2.62M ($6.12M - $3.5M) would  be subjected to a 45% tax = $1.18M tax due.

If Bush Taxes Expire $5.12M ($6.12 - $1M) would be subjected to a 55% tax = $2.82M tax due.

Source: Wall Street Journal
The circles on the right show how much in potential revenue each of these policies my bring into the Federal coffers (color coded to the info on the left) over a 10 year period (divide by 10 to get yearly tax revenue). 

One of the difficulties with this tax is that it can place the heirs of the deceased in a awkward and potentially damaging financial situation.

Refer to the  example I used above.  Assume this was your grandparents situation but ALL of the estates value was tied up in land and a nice house that sits on that land. Assume in their last will and testament they bequeathed it to you because they wanted it to stay in the family. 

Because all of the value is in a "non-cash" asset, YOU would have to come up with the $350,000 (OR the tax under the other alternative measures) to pay the Estate tax. OUCH!  If you could not pay the tax, then you would be forced to sell the property to pay the tax (or borrow it, I suppose)

I tend to think most estates in the US are this way---values are tied up in non-cash physical assets like houses and land and heirs struggle to maintain what they have been bequeathed. 

Whether that is right  or wrong, well, I don't know and never will.  I don't have any rich people in my family so this is an issue I can only write about and not actually experience.  :)

1 comment:

  1. This is very interesting, I did not know very much about Estate Tax, although inheriting mansions is not something I really have to worry about! I had a discussion in my English class yesterday about the whole 'fiscal cliff' issue. Unfortunately my teacher and I were the only ones who knew what the 'fiscal cliff' even was! It was an interesting discussion nonetheless, and I used your "band aid" metaphor to explain the issue to everyone!


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