Death and Taxes - The Blog

An Introduction to Apportionment

Apportionment relates to how (or from which property) estate taxes are paid.  A person with a taxable estate may die with property in various forms -- in her own name (that's probate property), in trust (non-probate), with beneficiary designations (non-probate), etc.

The question then becomes, how do we figure out which assets are used to pay the tax? The answer to this question may have a great impact on what the beneficiaries receive.  If all taxes are paid only from probate property, then beneficiaries under my Will wind up paying my estate tax (and having their bequests reduced).  That's why the general rule in Illinois is for courts to apply the concept of "equitable apportionment," which permits taxes to be apportioned among probate AND non-probate assets.  That strikes me as fair.

That being said, a testator is free to override the concept of equitable apportionment in his or her estate planning documents.  For instance, a Will might say something like this:

All estate and succession taxes, including interest and penalties payable by reason of my death, shall be paid out of and be charged against the principal of my residuary estate, without reimbursement from any person.

That language clearly indicates that estate taxes are paid from probate assets (and from the residue of the probate estate) only. 

I see two problems raised by the above language:

1. Why would you want to do this?

2. What if the estate taxes exceed the value of the residue?

The recent case of Estate of Williams (from the 3rd District Court of Appeals) tries to address question #2.  In that case, the court found as follows:

... [W]here a testator directs through her will that all obligations be paid from the residue yet the will is silent as to the source of funds in the case that the residue is insufficient to cover such liabilities, equitable apportionment must be applied if it is later discovered that the residue is in fact insufficient.  In such a case, the testator has failed to clearly express her intent as to who should be responsible for the additional payments and the will is ambiguous on this issue.  The application of the doctrine of equitable apportionment is therefore proper.

Inheritance Tax

In case you missed it, the You and Yours Blawg recently posted about a nice Washington Post opinion piece called "Tax Inheritance, Not Death."   

Like Deirdre R. Wheatley-Liss, who runs the You and Yours Blawg, I take issue with the authors' statement that "opponents of estate tax repeal have fallen back on a divisive class-warfare approach. The estate tax affects fewer than two percent of the richest Americans. Thus, they argue, the other ninety-eight percent of the population should oppose repeal." 

I'm sure some anti-repeal folks might be trying the class-warfare approach, but others are surely responding to the lies of the pro-repealers, who often try to convince Joe and Jane Middle Class America that their estates will be subject to estate tax.  If individuals in favor of repeal want to write articles with titles like "Estate tax hurts black Americans," then they shouldn't take offense when people opposed to repeal calculate (in this article) that the actual number of black Americans hurt by the estate tax this year is... 59 (dropping to 33 in 2009).

Some Personal Thoughts on the Estate Tax

Last week I posted a link to a satirical article about the estate tax.  In my post, I assumed that Clark Allison -- who had posted about how Karl Marx would have been in favor of the estate tax -- was also being satirical.  According to Mr. Allison, this was not the case.

It might surprise Mr. Allison to learn that I too am philosophically against the estate tax.  I see no reason why the government should try to topple family dynasties when (1) such social engineering rarely if ever works, and (2) family dynasties (usually via incompetent and/or lazy members of following generations) do such a good job of toppling themselves.  (Note that, if you run through the profiles of the wealthy families who are most actively lobbying for repeal -- like the ones listed in this pdf report on "The Campaign of the Super Wealthy to Kill the Estate Tax" -- you won't run across many first generation business creators.)

My philosophical objection to the estate tax is tempered by two interrelated points:

1. As The New York Times again pointed out in yesterday's magazine, under the current administration,  the budget deficit has risen from about $5.7 trillion (as of September 7, 2000) to more than $8.3 trillion today -- and projections indicate it will be about $12.8 trillion in a decade. 

I've read where some people believe the estate tax is immoral.  I guess morality is relative, because I tend to think that saddling my daughter and her children and grandchildren with increasingly enormous amounts of debt is a fairly huge moral failing. 

Mr. Allison states that "Like with all tax issues, it comes down to this: Who do you trust to make better use of your money - you and your family or the government?" But that's non-responsive -- this administration has already spent a ton of my money.  In fact, they've spent a ton of my money, and a ton of money they don't even have.  The question now is, who is going to pay for all of that spending?  "Repeal the estate tax" isn't an answer to that question.

2. To continue from above, if you want to repeal the estate tax, you have to show either that (a) doing so will not result in a loss of revenues or (b) the loss in revenues will be made up elsewhere.  I don't believe I've heard many people address either of these points.  Instead I've heard:

a. "Our polling says Americans hate the 'death tax.'"  Never mind the fact that pro-repeal folks have consistently distorted what the "death tax" is (even inventing a new name for it!) and who it affects when they do their polling.

b. "Farmers and small businesspeople are devastated by the tax!"  Of course, no one can locate any specific farmers who have been devastated. 

c. "The estate tax is bad because it affects too many people."  And yet the latest estimate is that about 13,000 estates will pay federal estate tax this year.

d. "The estate tax is bad because it affects too few people -- it just doesn't generate revenue!"  What about the huge predicted increases in estate tax revenues in the coming years? 

e. "The estate tax is bad because it causes people to want to make less money."  A tax that almost no one understands, that affects very few estates, is acting as some huge deterrent to the accumulation of wealth?  Is there evidence of any real, specific cases where this actually happened?  Do we have significantly fewer wealthy people now than we did before the estate tax was enacted?

f. "The estate tax amounts to double taxation!"  Except on all of that property that hasn't yet been subject to tax even once, of course.

g. "Look at all of the countries that don't have or have gotten rid of the tax."  Remember the Republican outrage over the Supreme Court's consideration of foreign law in Roper v. Simmons?  Evidently it has dissipated -- WWJD has been replaced with WWCD (What Would China Do?).

h. "Karl Marx liked the estate tax."  Yikes!  I don't even know what to say to that.

As I've stated previously, this isn't really an issue that impacts me professionally -- I did a lot of estate tax work back in my associate days, but about 1% (or fewer) of my current clients will have any sort of taxable estate.  I spend most of my days handling probate and probate litigation, or doing simple estate plans.

On a personal basis, though -- as a taxpayer and a citizen -- I'm just tired of the pro-repeal "arguments." If you don't like the estate tax because you think it's unfair to the rich, and you want to spread the revenue lost by the tax over the general population (by raising income tax rates, via a carryover basis regime, or something else), then just say that.  I'll probably agree with you.  But I'm sick of hearing ridiculous arguments (and even some outright lies) trotted out in an attempt to convince the American public of a course of action.  If we've learned anything over the past 4 years, it's that that kind of thing doesn't work.

The Swift Report on the "Deadly" Death Tax

Clark Allison's wonderfully satirical post on how Karl Marx would've loved the estate tax (it was supposed to be satirical, wasn't it?) now has some company -- check out The Swift Report's post entitled "'Death Tax' More Deadly than Gout, Polo Injuries Combined". My favorite part (besides the pictures):

In a recent survey, 43% of Americans said that they feared the death tax more than activist judges, Iranian President Mahmoud Ahmadinejad, gay migrants or fast-growing molds. Only an accidental plunge from a cruise ship or unwanted sexual advances from a female elementary school teacher incited greater fear among those surveyed. Sixty-four percent of respondents said they were "terrified" or "very anxious" about encountering misadventure on the high seas, while 57% said they worried about being hit on by a "hot" educator.

State Estate Taxes: Problems in '06

Deirdre R. Wheatley-Liss, the author of the You and Yours Blawg, has a great new post entitled "Beware the Snare - State Estate Tax on the Rise."  This is a stealth issue, one that's sure to cause problems but is not getting much publicity from the mainstream media.

I'll be out of the office for Christmas through January 3rd.  Happy Holidays to all of my readers!

Illinois Estate Tax Forms

This page includes helpful links to Illinois estate and generation skipping tax forms and instructions.  There's even an estate tax calculator (here).

Thanks to John Ahern on the ISBA Transactional Law Listserv for pointing this out.

The Estate Tax and Katrina

Pity those "poor" folks pushing for repeal of the estate tax.  They're up against a wall (so to speak), as Hurricane Katrina forces the nation to really look at and think about poverty.  The pro-repeal folks' solution?  Find someone who (1) perished in the Hurricane and (2) is subject to the estate tax. 

So far the search has been unsuccessful.  Time.com has the story here.

Federal Estate Tax Repeal, Part 11: The Vote Postponed, and The Wall Street Journal Speaks Up

I don't know if it's available online, but yesterday's Wall Street Journal had an editorial about estate tax repeal.  The editorial starts by saying that Senate Majority Leader Bill Frist has decided to delay a vote on repeal until September, and then launches into full attack mode against the estate tax. 

A few comments:

1. The Journal has a big problem with the revenue loss projections calculated by "the unelected number crunchers at the Joint Committee on Taxation (JCT)." 

a. You'll note the use of the word "unelected" here.  The Journal's idea is not that JCT employees should be elected, but rather to suggest (as the Journal does later) that JCT employees be replaced with "a staff whose predictions are at least in the same zip code of economic reality."  In other words, a staff whose predictions are approved of by the Journal.  Of course, such a staff also wouldn't be elected, but that's not really the point.  What's an activist judge?  A judge who rules in a way that I dislike.  What's an unelected government worker?  A government worker who does something (in this case, makes a calculation) that I dislike. 

b. I agree that it's important for us to have a clear picture of the revenue impact of estate tax repeal, but I differ with the Journal in how we obtain this picture.  They cite a study by an economist from the American Family Business Institute, to the effect that the JCT tends to overstate revenue loss from estate tax repeal, but I have to look at AFBI's website (aka "nodeathtax.org"), and wonder whether the group's agenda might have a little something to do with its economist's conclusion.  The Journal says the JCT ignores the impact of "faster economic growth, more savings, more job creation, and more capital investment that can be anticipated" by repeal of the estate tax, yet I wonder why the Journal makes no attempt to quantify this impact.  Are we simply to assume that the estate tax repeal will result in minimal revenue loss (or even a revenue gain) because the Journal says so?

2. The Journal states that there is "overwhelming support for repeal among voters," but I have to ask the basis for this opinion.  Were these polls also conducted by the AFBI?  It seems fairly easy to manipulate responses to an issue most people know very little about.  Will people dislike the estate tax more if I call it "the death tax"?  What if I misrepresent the number of Americans who will be subject to the tax?  On a similar note, the Journal says estate tax repeal "helped to defeat Tom Daschle in South Dakota last year."  However, when I look for evidence of taxable estates in South Dakota, all I can find is this study by AALU (the Association for Advanced Life Underwriting), which states (at the bottom of page 43) that about 74 estates per year will be subject to the tax from 2006-2020.  Did the voters of South Dakota really vote Tom Daschle out of office because he opposed the repeal of a tax that may affect 74 South Dakota estates per year? 

3. The Journal's position on capital gains strikes me as fairly inconsistent (remember that estate tax repeal would also repeal the current "step-up in basis" regime in large part).  In one paragraph, the Journal is criticizing the JCT for ignoring the revenue effect of the capital gains provision in the repeal bill.  Yet three paragraphs later the Journal argues that "[d]eath should not be a taxable event."  It seems to me that this latter position ignores the economic reality of the capital gains provision, namely that death will still be a taxable event for those who most need the money they are inheriting (i.e. most everyone but the super-wealthy). 

4. Near the end of the editorial, the Journal pulls out what appears to be the argument du jour against the estate tax: other countries don't have it.  Remember when the Journal (here) got up in arms over Justice Kennedy's referencing of international law in the juvenile death penalty case of Roper v. Simmons?  Back then, the Journal accused Justice Kennedy of being selective in his use of international law.  But isn't the Journal doing the exact same thing here?  More to the point, is it really relevant to use a list of countries without an estate tax, taken out of context with respect to things like budget deficits and income tax rates, in order to argue for repeal?

5. To me, the biggest question involving estate tax repeal focuses on whether those opposed to repeal will start using the same aggressive tactics as the pro-repeal crowd.  Yes, the estate tax affects a decedent's ability to give away property at death.  But can't it also be said to tax a less-protected type of income (namely, income that you never earned in the first place)?  If the pro-repeal crowd uses family farmers as their poster children, will the anti-repeal crowd begin to employ Paris Hilton and other spoiled heirs for the same purpose?

Federal Estate Tax Repeal, Part 10: NPR Weighs In

National Public Radio has a pretty interesting page devoted to estate tax repeal, including a link to a good  story featured today on Morning Edition, here.

Federal Estate Tax Repeal, Part 9: The Senate Vote Approaches

According to this morning's Wall Street Journal (in an article I can't locate online), Senate Republicans are scheduling a vote on federal estate tax repeal for next week.  A couple of points from the article:

1. Republicans know that they don't have the 60 votes necessary to get the legislation approved, but want to either (a) encourage a compromise with or (b) "smoke out" those who oppose repeal.

2. Federal Reserve Chairman Alan Greenspan recently said that Congress shouldn't be cutting taxes unless it can find other revenue to offset the loss to the Treasury.