In 2005, authors Michael Graetz and Ian Shapiro published “Death by a Thousand Cuts,” which outlined the history of the estate tax and illustrated how the estate tax became a political hot button. The book highlights how the estate tax, which was once thought of as an economic equalizer, became one of the most despised tax regimes.
The estate tax, which was first adopted to fund the country's defense efforts, has been on the books in its modern form since 1916. Theodore Roosevelt said that the “primary objective [behind the estate tax was to] constantly increase the burden on the inheritance of those swollen fortunes, which is certainly of no benefit to this country to perpetuate.” Roosevelt’s philosophy became less popular as the cultural admiration of business icons grew. The American ideology gravitated to protecting individual wealth. This ideology spread to farmers, small-business owners, and families who were not part of the upper crust. The movement to eliminate the estate tax began. Though it may have been started by the wealthiest families and their lobbyists, its crusaders became a large group of Americans whose estates would never be subject to estate taxes. Eliminating the estate tax became a matter of principle. The moral question became, why should the government get anything when you die if you work long hours, earn money, and pay income taxes?
The movement to eliminate the estate tax came to a head in 2001, when an unprecedented tax cut was enacted to repeal it in 2010 and reinstate it in 2011 (unless subsequent legislation extended or modified the repeal). But this one-year repeal created an impossible situation for Americans who pay the estate tax. Their tax and estate planning attorneys came up with myriad proposals to accommodate this quirky new law. One popular proposal was designed to function like a light switch: If the estate tax was repealed, the tax elements of the estate plan would turn off; if the estate tax was reinstated, the tax elements of the estate plan would remain on. Another proposal, though a morbid one, was to add terms to health care powers of attorneys and living wills that would give an agent discretion to keep the patient alive until the estate tax is repealed in 2010.
The 2001 tax law prompted some of the most complex and creative estate plans in history. Under the 2001 tax law, each individual may leave assets of up to $2 million without paying any estate tax, which is commonly referred to as an exemption. The current law raises the exemption in 2009 to $3.5 million per individual ($7 million per married couple). The exemption excuses the vast majority of Americans from paying any estate tax. However, estate tax has become such a political hot button that in 2006, the Senate was only short three votes from permanently eliminating the tax (57 of 60 votes in favor of a repeal).
The crusaders seem to be ignoring the tax cuts that have the most impact on the majority of Americans. In 2003, there were drastic cuts to capital gains and dividend taxes. Those tax cuts are also due to expire. However, the focus remains on the estate tax.
As the election nears, the presidental candidates’ estate tax policies may be as closely scrutinized as their positions on health care reform and on-shore drilling. Neither of the candidates support the repeal of the estate tax in 2010. Instead, they each propose raising the estate tax exemption to save an even larger number of very wealthy individuals from the tax.
Katarinna McBride is a wealth preservation partner at the law firm of Beerman Swerdlove LLP. She can be reached at 312-621-1232 or kmcbride@beermanlaw.com.
