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The House just voted to abolish the Estate Tax. I don't like the tax - but what they did wrong was not making it taxable by the recipients.

Here's how I'd treat the Estate Tax:

(1) No tax is charged on the Estate. All assets are transferred to the inheritors, nothing withheld.

(2) Any cash inherited is treated as wage income. This would mean that it gets taxed at the recipients tax rate, and as income. Those with high incomes get a large portion taxed, those with low incomes get very little taxed.

(3) Non-cash assets (stocks, bonds, properties, ownership of a business) becomes a capital gain with a basis value of 0. That means that if/when the recipient disposes of it all, the entire sales amount is taxed. If sold within a year, it's taxed at short term capital gains amount. If held for longer, it's taxed at long term capital gainst amount, but again, the entire sales price is taxed.

Why? First of all, it puts the tax burden on the recipient, based on the recipient's income. If the deceased was very rich but is giving his money to a lot of non-rich people, the non-rich people get it all. If the deceased was not rich but giving it to a rich person.

Second, it removes a lot of fiddling and the government making judgements it shouldn't. Take the family house. In most cases, you can leave the house to a spouse without it being taxed - but not a child, a valued employee, a very close but not legally married person, and in states without same-sex marriage not a significant other of the same sex. Under my suggestion, you can leave your house to whoever you want. If that person chooses to live in it until their death, they can do so without being in an "approved relationship" to the deceased. If they want to sell it, they can, the whole sales price being taxed.

It also removes issues of valuation from estates. How much is this business worth? How much is this artwork worth? It moves the tax to the time of sale, and at that time you know what it's worth, it's worth what the buyer is willing to pay for it.

And last, and most importantly, no destruction of assets to pay the taxes. No worry about "do we have to sell the business to pay the estate taxes". No worry about "what treasured posession must be sold to allow someone who treasures them  as much to get what they can." If the family is going to keep living in the house, driving the car, running the business, they can do so instead of selling it to satisfy the taxman. If the recipients choose to sell these items, they are still fully taxed, be it the first generation, second, third, or fourth.

Posted on April 16, 2015, 8:24 pm

Donald Brown

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