Financially speaking, columnist Michael Taylor says 2018 is a good year to die.
This year is shaping up as a great year to die.
I don’t say that because North Korean leader Kim Jong Un has readied his nuclear arsenal and aimed it at the U.S., (badum-cha!), but rather because of recent changes to estate tax rules.
Before now, the previous best year to die was 2010 when the estate tax took a gap year. That’s like the kid who takes a year off after high school to hitchhike across Chile before heading to college.
I remember that year mostly because, as a result of this legislative gap year quirk, the Steinbrenner sons Hal and Hank, owners of the New York Yankees, saved an estimated $600 million in estate taxes when family patriarch George happened to die in 2010 rather than 2009 or 2011, according to the Wall Street Journal.
We’re back to some good times for dying following the big federal tax reform passed December 2017.
Some people who hate the estate tax — a tax known by haters as the “death tax” — point out the cruelty of the government taxing something like death. Those unavoidable certainties of life, death and taxes, together in one nasty package! But that’s the wrong way to look at it. Economic theory and common sense posit that we should heavily tax the things we don’t want to see more of.
As in the examples of cigarettes, alcohol, and affordable Chinese steel, we apply taxes to reduce their occurrence in our lives. If we want to reduce death, we should tax it heavily. Lower the tax on death and we should reasonably expect an uptick in untimely deaths among the super rich.
If you’ve forgotten the reform passed in December 2017, and if you have a net worth less than $25 million, I don’t blame you for forgetting. Congress doubled the estate tax threshold to $11.2 million per individual and $22.4 million per couple.
That means that a lucky child of a wealthy family can inherit her first $22.4 million from mom and dad tax free! After that, the remaining estate would be subject to a 40 percent tax rate, although of course armies of tax and estate lawyers stand ready and able to reduce the full impact of that 40 percent tax rate.
The number of estates that exceed the $22.4 million threshold and will likely be subject to the estate tax was cut by more than two-thirds from an estimated 5,300 estates in 2017 to 1,700 estates in 2018.
The next great thing last year’s tax overhaul did to encourage death in 2018 is maintain a step-up basis for inherited appreciated assets.
In plain English, that means most heirs will save big on capital gains taxes on inherited shares of stocks. For example, if Grandad’s shares appreciated by $500,000 over his lifetime and he wanted to sell them while still alive, Grandad would likely owe the IRS $100,000 since capital gains are taxed at 20 percent.
Under the new tax plan, his granddaughter can keep the shares without paying those taxes. Her cost basis when she sells would be the price at his death — another great tax benefit of, well, death.
I imagine two kinds of readers of the above paragraphs. The first kind is like “why is he talking about such huge amounts of inherited money? Why doesn’t he focus on ordinary people’s investment portfolios? I can’t relate!”
The second kind of reader (a smaller group) is like “Shhhhhut up. Somebody tell him to shut up about that stuff. Hopefully most people can’t relate to the gift we just got handed in 2017, and their eyes will glaze over.”
Put it this way: You may not have paid attention to the raising of the estate tax limit and the maintenance of the step-up in basis law, but everyone with a net worth over $25 million definitely noticed.
I’m being a bit flip about death taxes, partly because I know that it inspires a bunch of hate mail every time I write about it, and I’m steeling myself with humor for the nasty comments to come.
At the same time, wealth inequality is one of the top three issues in America, and the estate tax is one of the symbolic ways we address it.
As a practical matter, the estate tax hasn’t historically raised significant government revenue and it inspires inefficient tax-avoidance strategies.
As a symbol of societal priorities, however, the estate tax matters a lot, at least to me. My man Winston Churchill — grandson and nephew to the Duke Marlborough and deeply enmeshed his entire life in the British aristocracy — said estate taxes provide “a certain corrective against the development of a race of idle rich.”
The history that I read as a kid taught that opposition to an entrenched aristocracy is one of the defining points of agreement in American political thought. We no longer seem to agree on this point.
My eldest daughter was born on the same day as the French celebration of Bastille Day, so every year we make a “let them eat cake!” joke after she blows out her candles.
That iconic historic moment, in which the clueless aristocracy bought their tickets to the guillotine by ignoring the pent up rage of the poor, is why the estate tax matters. Extraordinary wealth inequality normally only changes extremely slowly. But then sometimes change comes extremely quickly.
The 2017 increases in the estate tax exemption are set to expire by 2025. That provides a certain uncomfortable incentive to the very rich in the next few years to, you know, get on with it.