The San Jose Mercury News has reported that a very wealthy client has taken out life insurance policies worth a world record 201 million US dollars, spending at least 5% of that in annual premiums. Financial experts attribute just one likely motive — to mitigate and/or avoid estate taxes upon death.
The United States has had a federal estate tax in place since Congress passed the War Revenue Act of 1898, the purpose of which was to raise funding for the war with Spain following the sinking of the USS Maine in Havana Harbor, Cuba. The Republican who proposed the original House of Representatives bill #10100 to fund the war favored fair public participation via sales taxes. The Senate Democrats, however, along with a few Republicans, made several amendments that added an estate tax to the bill. For the past 115 years, countless Americans have paid those taxes on their demise.
Despite the Supreme Court’s finding that these estate taxes are constitutional, we should ask if they are a good and fair way of raising revenue, and if the law should be finally be repealed.
Much of this debate centers around the definition of fair taxation. The conservative approach focuses on everyone’s participation through consumption, or sales taxes. The more one purchases, the more one pays, using a percentage of the price to determine the taxes owed. By contrast, the liberal approach is to tax the rich Americans at a higher rate, taking a disproportionate amount (due to an increasing rate) based on their possessions. And the least objectionable way to do that is to tax them when they die.
At this point, you might be saying, “Yeah, but this estate tax only applies to the super wealthy.” But first consider how you would respond to this approach if the law did apply to you, a middle class citizen.
Imagine this scenario: Your parents are driving down to Florida for a nice beach weekend together and have an unfortunate and fatal accident. The probate comes through and your tax attorney informs you that you have inherited all their possessions, with a net worth of $100,000. By today’s standards, that’s not a lot, but it’s something. Then he says, “But you need to pay the federal government $23,800 immediately.”
If you would object to the government taxing your parents at their death, and putting you in the position of having to sell some possessions in order to get the IRS off your back, then you should object, out of principle, to this same approach being applied to the wealthy. This country is founded on equality and this should apply to taxation as well as rights.
Today, the estate tax applies to all US citizens, with a 5 million dollar exemption and a 35% tax rate. When structured correctly, the proceeds of the life insurance policy go directly to the beneficiary, rather than the estate, and therefore can be excluded from estate taxes. This is most certainly what the mystery record-setting policy holder has done to avoid, or significantly reduce, the amount of federal “death taxes” to be paid.
Attempts to use regulation to take from the rich are often thwarted by clever financial advisors and legal experts, even when the objective is to wait until someone’s demise. Once again, the middle class gets hurt by this attempt and the attorneys cash in.
So is it time to eliminate the federal estate tax? Consider the following countries who have recently abolished it:
- 1972 Canada
- 1979 Australia
- 1981 Israel
- 1985 India
- 1992 New Zealand
- 2005 Sweden
- 2006 Russia
- 2006 Hong Kong
- 2008 Singapore
- 2008 Austria
- 2014 Norway
In America, the government already taxes our property and our income while while we’re alive. And it’s difficult enough to deal with the passing of our parents when it happens. Let’s work to eliminate the estate tax and stop taking money from the dead.