How Much Will Heirs Pay If You Die in 2010
Bill and Fred were identical in every respect, same birth date, same income, same taste in music. In fact, the only factor that differentiated them was their spending and savings habit. Bill was a big spender, but Fred was more frugal.
They both died the same day. Bill left some nice possessions to his heirs, worth about a million dollars. Fred left a sizable estate, worth about five million dollars.
Bill’s heirs got to keep all of his stuff.
Kevin Bourke
Fred’s heirs? Well, it depends. If Fred died in 2009, his heirs had to pay $675,000 in estate tax. If he died in 2010, his heirs owed no estate tax (but might owe capital gains tax). If Fred died in 2011, his heirs owed $2,045,000 (these numbers from a study done by Deloitte Tax).
What’s going on here?
In the early part of the 20th century, the United States enacted an estate tax, designed to tax the wealthiest families. There are many reasons tossed about: to pay for war efforts, to prohibit any one family from having too much influence on the country, to distribute wealth more evenly. It doesn’t really matter why, what matters is that it’s yet another tax to worry about.
Why should you care? Because anyone with a million dollars in net worth, whether it be equity in a house, a business, a retirement plan, or any other asset might need to review their estate plan. Soon.
Let’s take one of my neighbors, who inherited the house he grew up in and lives there now. He is single and owns the home free and clear. He would never think to describe himself as rich, yet his net worth is over a million dollars, just in home equity. He might also have a savings account, investment account, and a retirement account.
Should he care? Yes! Because his estate might be subject to estate tax should he die in 2011 or after. At least that’s the way the law reads now.
Recently, the House passed a bill repealing the provision that allows for no estate tax in 2010. But the Senate hasn’t addressed it yet. In the meantime, health care is on the front burner, estate taxation is not, so it’s hard to know what will happen next.
What if a person died with a large estate on January 1, 2010? Initially, his or her heirs might think no taxes were due. But what if Congress raises the 2010 estate tax rate retroactively? Then those heirs might have to cough up cash that they were already planning to spend, in order to pay taxes. Delightful.
It’s a big, fat, hairy mess. The current law was goofy to begin with, back when it was instituted in 2001, but it was a compromise between those who wanted to abolish the estate tax and those who wanted to leave it as is.
My opinion? The estate tax is not going away any time soon, and you would be wise to plan for it, even in 2010 when it theoretically doesn’t exist. Hopefully, Congress won’t institute an estate tax later in 2010 retroactively, but I don’t think they have a choice.
What should you do? Ask your tax preparer, financial planner, or estate planning attorney to keep you in the loop. Keep an eye out for news, and don’t forget this important topic. Even a person with a modest income and lifestyle could potentially be a target of the estate tax.
Kevin Bourke is a registered principal with and offers securities through LPL Financial Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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Comments
Make the tax 100% and let the lazy scions pull themselves up by their own bootstraps like the rest of us!
;-)
Walter (anonymous profile)
December 21, 2009 at 7:29 a.m. (Suggest removal)
When the founding fathers established this nation, one of the injustices of the old country that they rebelled against was the inherited aristocracy. They wanted this country to be based on merit.
In order to make room for each new generation of high achievers, we must ensure that the children of the previous generation's achievers do not by default grab all the good spots. The inheritance tax is one of the means to make this happen.
The phasing-out of inheritance taxes was/is offensive to me, and I am glad that it had a sunset clause. We can discuss what the exemption amount should be, and what the tax rate should be, but there is no doubt in my mind that social justice demands a significant tax on large estates.
On the other hand, the existence of a year with no inheritance tax, to be followed by years with high estate taxes sees to be an invitation for the scions to kill their parents. It has been dubbed "throw-momma-from-the-train-year".
ljp93105 (anonymous profile)
December 21, 2009 at 8:27 a.m. (Suggest removal)
Poor widdle rich children, boo hoo hoo.
Bill Gates Sr. and Warren Buffet support the estate tax.
"Even a person with a modest income and lifestyle could potentially be a target of the estate tax."
"Modest" my a.. You're clueless about how most people live.
truth_machine (anonymous profile)
December 21, 2009 at 11:35 a.m. (Suggest removal)
As a progressive tax, the estate tax serves an important purpose in our economy. The preservation of the estate tax is essential to the government's ability to finance important policies and projects, as well as promote the democratic ideals that serve as the foundation of our government. Therefore, not only do we need an estate tax, we require a strong estate tax. Some believe that an extension of the 2009 estate tax policy serves as a tax break for the ultra-wealthy, and is ultimately inadequate for the needs of the American people. For more information visit: http://www.faireconomy.org/news/estat...
etaxintern (anonymous profile)
December 21, 2009 at 12:25 p.m. (Suggest removal)
Lots of angry poor people read this paper it seems. Some of you should worry less about attacking families that make sound financial decisions to generate wealth for their loved ones, and try to find a way to do something positive for your children yourselves. If you raise your kids to think that the only way they can get by is to take money from the people who earn more, they will die poor same as mammy and pappy.
rcobban (anonymous profile)
December 21, 2009 at 2:24 p.m. (Suggest removal)
Bill Gates Sr. and Warren Buffet aren't angry poor people, they are simply knowledgeable and intellectually honest, and recognize how vast sums of inherited wealth work against American principles of democracy and merit -- we were once quite different from the aristocracies of Europe, but have headed back in that direction. Even with the estate tax, Paris Hilton and those like her can continue to live their unearned lives of luxury. That rcobban refers to such folks as "the people who earn more" shows how intellectually bankrupt are those who oppose the estate tax.
truth_machine (anonymous profile)
December 21, 2009 at 5:46 p.m. (Suggest removal)
Bill Gates and Warren Buffet are welcome to do whatever they please with their own money. Do you think this tax only affects the richest billionaires in the world? A modest family that had the foresight to buy a home in the Santa Barbara area 30 years ago could easily find themselves now losing the home they grew up in to your tax. A family that plans for their future wisely should be able to leave a business they started and worked for their entire life, or the home where they raised their family, to their children without being forced to sell them to pay jealousy taxes.
Talk about morally bankrupt truth_machine, you talk of everyone who has money like no one ever did anything to deserve it. Some people work their butts off their entire lives so that their families will be comfortable when they are gone. They create family businesses that will provide their children with job security for their entire lives. They even create the businesses that you work for, or don't as I can only assume you are a part of some assistance program that you would like to have funded by this tax.
If you think that everyone with money is like Paris Hilton, you watch too much TV. Her only crime is that she has more money than you, which apparently makes her evil and lazy. You may not like her, or what she does, but does that give you the right to take the money that she has? Who are you to judge whether someone has worked hard enough for what they have?
Where does that stop? Anyone who thinks someone else doesn't deserve the money that they have can just go ahead and take it from them? You would tell a father he cannot give money that he earned, yes I said earned, to his daughter? Do people need the truth machine in their homes telling them if and when they can buy a car for their child? How much they are allowed to pay for their college? What kind of clothes they can wear and how many pairs of shoes they can own? Thanks but no thanks. Perhaps you would be more comfortable in a broken communist country where everyone waits in the same line for bread... as equals.
The next time you guys get a check from the government, think about sending a thank you note to your neighbors.
rcobban (anonymous profile)
December 21, 2009 at 7:45 p.m. (Suggest removal)
http://www.lewrockwell.com/paul/paul3...
e_male (anonymous profile)
January 2, 2010 at 12:15 p.m. (Suggest removal)
Here is quote from the above link:
"The real motivation behind the estate tax is a deep-seated hostility to property rights, and a misguided fear of family dynasties. Money inherited from an estate is either spent, saved, or invested all of which are better for the economy than sending it to Washington, where bureaucratic overhead consumes at least 50 cents of every dollar.
If you truly own your property, you have the right to dispose of it any way you wish. You can sell it, give it away, or direct who will receive it when you die. This control is the essence of property rights. If you can't control what happens to your property, you don't really own it."
e_male (anonymous profile)
January 2, 2010 at 12:23 p.m. (Suggest removal)
Some of us came from NOTHING, inherited NOTHING, and worked our butts off to get to where we are today. We support charities, arts, schools, etc. not only because we can but because we choose to. We are thankful that we are where we are today and able to help others less fortunate. Getting educated (even if only finishing high school), waiting to have children until you can afford them and have grown up yourself, learning to become fiscally intelligent, these are only some of the goals parents should be teaching and helping their children achieve so that they too have a chance at creating their own "wealth". No government has the right to take unfairly from those who have worked and earned what they have to give to those who chose the lazy path. In the end, you should have the right to pass what you have accomplished along to your children without being devastated by taxes even if it is the family farm, a couple thousand dollars, a family business or whatever. We all have to "pitch in" to pay our part for our country, but all our politicians do is waste it on ridiculous programs or wars that don't work. Keep our money as local as possible to make certain the people who give it and who need it in our own communities are the beneficiaries. NO money to those who don't even try to better themselves through the free programs they are offered. Better to take care of the children and help guide them to be better citizens and to seniors who worked hard but still need our help.
beachwalker (anonymous profile)
January 4, 2010 at 9:26 a.m. (Suggest removal)