Draginol Draginol

More on inherited wealth

▼

More on inherited wealth

Earned income vs. unearned income

from JoeUser Forums

My last article on inheritence taxes sure drew some controversy.  Surprisingly, much of it from conservatives.  Perphaps it's because I'm an only child or perhaps I just don't have the "correct" attitude on families but to me there are two types of income: Earned and unearned.  My problem with welfare is that it provides unearned income to people.  And so to me, inheritence isn't much better than welfare.

Before you turn your flame throwers on, hear me out.  My view is very straight forward -- inherited wealth should be taxed as any other income.  If I bust my ass and earn $10 million over my lifetime, it's going to be taxed.  So why should some guy earn $10 million while sitting on his rear end without having to pay taxes simply because he shares some genetic material with the provider of that wealth? To me, that's insane.

Realestate was used in my previous article to illustrate how this can really get out of hand.  The more you know on how huge tracks of private land in the US was acquired, the more I think people will rail against the idea of a free lunch when it comes to handing down land.  So let's use some southern plantation as an example.  200 years go Johnny Reb builds a plantation on 100 acres of land in the deep south. He didn't really "buy" this land but rather squatted on it until it became his by default.  Through generations, that same land stays in the family through inheritence.

Fast forward to now. Johnny Reb V passes on leaving the 100 ascres to Johnny Reb VI.  It's valued at say $10 million. Should Johnny Reb VI just get that land? That's where the debate is.  I say that Johnny Reb VI owes income taxes on it.  At $10 million, that would be 35% ($3.5 million).  Assuming Johnny Reb VI hasn't been complacent, having grown up with immense wealth around him, he should be able to get together with either other family members or investors and pay that $3.5 million.  Then the land is available to be handed over to Johnny Reb VII.  If not, the land is sold and Johnny Reb VII pockets $6.5 million of it (not bad for not having had to spend a lifetime earning it through labor). At that point the land is available for Billy Yank I to purchase it and pass on to Billy Yank II if he is able to pass the tax muster.

I do agree that traditional inheritence taxes are too high. Inheritence income should be treated as any other income and not discriminated against.  But at the same time, it shouldn't be eliminated entirely either.  You earn your money, it's taxed it's yours.  But that has nothing to do with your children, let alone your great great great great grandchildren.  They did nothing more than be born to "earn" it.  The system should be biased in favor of keeping assets within a family, but it shouldn't be a free ride.

politics
13,793 views 33 replies
Reply #26 from JoeUser Forums Top
For such an economist, Brad, you should realise that Inheritance Tax hits those of self-made wealth the most. Taxation is simply legalised theft on behalf of workshy plebs.

It is much the same as any form of taxation, proportionally the poor pay more tax than I do. The rich can afford to shelter their wealth. It is a common misconception that the wealthy pay more tax than the peasants, most tax comes from the less well off.
Reply #27 from JoeUser Forums Top
little_whip:

Those Hummel figurines are an interesting case.

The fact of the matter is, your parents worked very hard for many years, to accumulate the wealth that those figurines represent.

The reason you cannot afford the tax on them is the same reason you cannot afford to buy your own Hummel collection right now: you haven't focused your wealth on that task.

Now, I'm not sure it's good to put descendants in the position of having to re-purchase the legacy their ancestors already worked so hard to provide. But assuming there's nothing fundamentally wrong with an inheritance tax, your problem is that you've been spending all your wealth on building your own assets, rather than spending it on acquiring your parent's assets.
Galactic Civilizations III
Reply #28 from JoeUser Forums Top
LW -

I believe that the first $X of an inheritance passes untaxed, I'm thinking $500,000, but that could be off.

Cheers,
Daiwa
Reply #29 from JoeUser Forums Top

Some quick facts for those so inclined for such things:

Year of Death Exempt Amount

2003

$1 million

2004 or 2005

$1.5 million

2006, 2007 or 2008

$2 million

2009

$3.5 million

2010

No estate tax

2011

$1 million unless Congress extends repeal

http://www.nolo.com/article.cfm/ObjectID/DAC2BB31-35E4-43B2-9BDFA70AD3775418/catID/257899BC-C5FA-435D-BA9BCC083F55357E/309/126/FAQ

I.e., even at the lowest levels ($1 Mill) most people don't have to worry about estate taxes.    It seems about 2% of estates qualify at that's at todays much lower exemption levels.

Also, one does not pay income tax currently on the same estate being passed on to them.   Just the estate tax.    Technically, the person recieving doesn't pay anything at all, the estate actually pays the tax itself.    But I suppose it could be percieved as the same thing (not too dissimilar net effects)

Anyway, it's a wonder what a few minutes of google searching can do.    You may now continue your flamewar...Ah, "spirited discussion" ...already in progress.

Reply #30 from PolMach Forums Top
Reply #31 By: C & H Wood - 5/17/2005 9:53:31 AM
Some quick facts for those so inclined for such things:
Year of DeathExempt Amount

2003$1 million
2004 or 2005$1.5 million
2006, 2007 or 2008$2 million
2009$3.5 million
2010No estate tax
2011$1 million unless Congress extends repeal


There are multiple ways of dealing with the Estate tax issue that can help. If you are so inclined, you might hear a world of great information by listening to talk radio like Ric Edelman on WMAL AM630 (wmal.com) on the weekends (Saturday morning, 10am east coast time, available via web streaming I think), or Bob Brinker or a host of other financial talking heads.

Between the financial advisors and the lawyers you can also hear, there's a literal wealth of great tips and info on establishing trusts, and using insurance and other means to help protect the assets one might want to pass along to an heir.

For most people, the numbers above seem to not really impact, but you have to be very careful in thinking you are not going to be impacted. In the Washington, DC area (as an example) home prices and home values (and property values) have risen so fast that people that wouldn't have been impacted under old numbers can very easily find that the estates they are dealing with are much more valuable than they assumed or were aware of.

Just like the AMT (alternative minimum tax) which now hits more people than it was originally designed to, people many times are not aware of their own wealth, or the wealth of family members.

Think about it, no one ever wants to face their own mortality or that of others. And talking about someone's wealth as an inheritance seems too morbid for most people.

It is highly advisable to speak with financial planners/advisors and lawyers and make sure that you cover things as best you can. But... keep in mind also that for many "working poor" and middle class individuals, it may not be easy to find the money to put into the hands of the lawyers and financial planners that would help lead to a larger pile of wealth in the future.

Perhaps it's an area where the government should provide services for free, but then again, think about the conflict of interest that would exist there? The government would be paying for a financial advisor that would be trying to keep you or your heirs from having having to pay more into the hands of the government. Would the government ever really want to do that?!?
Reply #31 from JoeUser Forums Top
Sell the property to your kid for $1 (plus legal fees) before you kick off. I don't know about you all, but I pay property taxes every year, as long as those taxes are paid to date, I can do what ever I want with the property. Whoever gets it next, be it family or otherwise, will have to pay taxes yearly on it too. Inheritance tax (and many others) are just cons to make money off of cash and valuables that has been previouly taxed anyway.

Now if you want to see something truly stuiped, come down here to sunny southeast Virginia, where we pay personal property tax on our cars every year (yes, in addition to when we first bought it). It depreciates with the value of the vehicle over the years, but still that's why my car is 10 years old (can't afford to pay every year for a new one). Must be a plan to keep everyone in junkers.
Reply #32 from PolMach Forums Top
Sell the property to your kid for $1 (plus legal fees) before you kick off.


Great plan, too bad the IRS would completely and totally dis-allow such a scheme. They'd still tax you on the fair market value.

Understand that for the most part the government knows what things are valued at, and they find a way to get taxes on those values.

The same holds when you give away a car to a charity. You can only get FMV (fair market value) for the vehicle, and can't just write in an inflated figure for the value. You used to be able to write in some amounts, but the IRS started cracking down on that practice, and requires tons of documentation that really holds down the value when you go to write the vehicle off as a donation.


There are also rules that prohibit anyone from giving away more than a certain amount of money in a given year as a gift, though thatis one way to help provide wealth to someone else. You can gift them a certain amount of money each year, or however often the deadlines are, and just keep repeating the process. The problem is that limits are relatively low, and not near enough to allow you to transfer over an entire estate unless everyone lives a very long time and the person giving stuff away never sees the estate go up in value. :-/

nice try though
Reply #33 from PolMach Forums Top
The problem is that limits are relatively low, and not near enough to allow you to transfer over an entire estate unless everyone lives a very long time and the person giving stuff away never sees the estate go up in value. :-/


For a family farm you can give a little at a time, that is why you incorperate. You give shares of the farm. Totaly legal.