The Tax No One Will Ever Pay
Former U.S. Secretary of State and Democratic Party nominee for president, Hillary Clinton, recently updated her proposal on increasing the federal estate tax from the current top assessment rate of 40 percent to 65 percent. Before winning the nomination, she'd suggested raising the rate to 45 percent.
Her latest proposal also reduced the exclusion amount for individuals from $5.45 million to $3.5 million. And, it would impose a marginal estate rate of 45 percent on estates between $3.5 to $10 million. Beyond a taxable estate of $10 million, Clinton has proposed that the rate jump to 50 percent. At $50 million, it would rise again to 55 percent. Finally, at $500 million, the rate would top out at a 65 percent assessment.
Clinton's latest proposal numbers might sound familiar. Her opponent for the Democratic Party nomination, U.S. Senator Bernie Sanders of Vermont, had called for a 65 percent estate tax rate during his failed campaign. He introduced it as the "Responsible Estate Tax Act." We can only speculate that Clinton's latest change was made to entice Sanders' more progressive supporters.
Tell Your $500 Million Dollar Clients the Time to Plan is Now
Sorry, we've always wanted to type that sentence in bold letters. More than likely you don't have many clients worth $500 million dollars or more. ... But hey, if you do have some, why haven't you referred them to our law firm?
Today, 99.8 percent of estates owe no federal estate tax at all, according to the Joint Committee on Taxation. Among the few estates nationwide that owed any estate tax in 2013, the average effective tax rate - that is, the share of an estate's value paid in taxes - was 16.6 percent according to the Urban-Brookings Tax Policy Center. That is far below the current top statutory rate of 40 percent.
And so, if a 65 percent estate tax rate would only affect two-tenths of 1 percent of our nation's citizens, why would the other 99.8 percent of voters care? Considering the size of the current federal budget, the estate tax doesn't generate much revenue to begin with. All this talk about upping the tax seems to be just more politics as usual and not actually a plan to generate tax revenue.
The Truth: The Ultra Wealthy Won't Pay the Tax
Let's assume Clinton's proposal to raise the estate rate passes Congress and she signs it into law. We supposedly would see a budget buildup allowing the government to spend an estimated $260 billion dollars of tax revenue that Clinton believes the hike will generate. (Which it never, ever will).
Pretend you have $500 million dollars. Do you know what that can buy? Just about anything, really. That kind of wealth can hire the best legal, financial, accounting, and insurance planning minds in the world! You would hire these experts to solve one issue: Preventing your estate from losing $65 dollars out of every $100 to the IRS.
Think about it. Doesn't it stand to reason that the taxpayers who represent two-tenths of a percent will use their wealth to keep that wealth? While we understand Clinton's motivations, the only people who would ever pay a 65 percent estate tax are the ones who do no planning whatsoever or are compelled by such a sense of extreme patriotism that they will willingly hand over 65 percent of their assets.
The people targeted by this tax can hire the best advisors and never pay a nickel to the IRS. If you've ever done any form of high net worth planning, then you know this to be true.
Everyone Will Create a Private Foundation
The ultra-wealthy will create private foundations to avoid this tax. Charitable Lead Trusts, Charitable Reminder Trusts, Grantor Retained Annuity Trusts, and a bevy of offshore tools will be used by that select group of ultra-wealthy to pay zero estate tax.
Please, don't think we're pointing out creating foundations as an intended slight to Bill and Hillary Clinton or the Clinton Foundation. However, this strategy is the big pink elephant in the room when it comes to talking about the ultra-wealthy and asset protection. We mention the Clinton Foundation to save us from later responding to a barrage of angry emails reminding us that "the Clintons did this, too."
Our point is that the ultra-wealthy will never pay a tax of 40, 45 or 65 percent of their assets if they created a solid estate plan. Clinton's latest estate tax proposal is more likely meant to influence former Sanders supporters to vote for her than it is a strategic tax policy. Republican nominee Donald Trump's proposal to eliminate the estate tax altogether is his attempt to sway voters, as well, and it is just as unlikely to become law.
We hope this information is useful to you and helps your clients and their families. If you have a specific case you'd like to work on together, say for instance, a $500-million-dollar client, please don't hesitate to call our office at 919-443-3035.