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I am not an expert - I appreciate and (without being an expert) mostly agree with the comments that promote the estate tax as redistribution of wealth. But: I

I am not an expert - I appreciate and (without being an expert) mostly agree with the comments that promote the estate tax as redistribution of wealth. But: It seems to me, as usual, that small business owners (their progeny, that is) are the ones who get screwed by estate tax. Full disclosure: I am not a small business owner, but my father has been for nearly 30 years. I anticipate that my younger brother, who works in the family business, will be more affected by this than I will be, so I consider myself fairly objective here. In our example, my parents are doing fine, but they are by no means a "wealth center". My dad worked hard building the business. It took about 20 years for him to see meaningful profit (it's manufacturing). So the problem as I see it is that my parents (like other small business owners) have the majority of their "wealth" tied up in the business. So the business would need to be dismantled in order to pay the estate tax, which leaves my brother (also working hard) in a tight spot. I'm sure that there are ways around this, and hopefully they are thinking about that. I know that at some point there was a large life insurance policy meant to cover the tax. Sure, it's still redistribution of wealth, but us folks in the middle are the ones that feel it. The top dogs will still pass most of it on.

ghouse 9y ago
With a exemption on the first $22 million gifted to your brother by your parents after the surviving spouse dies, I don't think this fits the definition of "small" or "in the middle."
- logfromblammo 9y ago
  Incorporate the business. The parents as the majority owners on the board elect the brother as CEO. The brother appoints siblings to executive positions. The executive salaries include stock grants. The company then trades shares of stock for life annuities of equivalent present value. Essentially, the company starts a pension plan for its owners. As long as they still live, the parents take pension payments, in lieu of dividends or distributions, and the kids gradually build up equity by "working" in their executive positions. The pension benefit appears as a liability on the balance sheet, depressing on paper the basis of the privately-held company stock. When the parents die, their beneficial interest in the form of the life annuity is terminated immediately, without any intervention by an executor or probate judge. That cash flow from the company is now freed up for dividends. The value flies from the present value of the life annuity to the stock price of the company that no longer has to pay it, just as the last breath leaves the body, so fast that the taxman cannot catch it. The kids will realize a capital gain if they ever sell their stock, and will see a rise in dividend income going forward. This increase in wealth would be the same size as a normal inheritance, but does not trigger taxation until they sell the stock, and avoids estate taxes entirely. Income tax is paid quarterly. This is fine. The estate tax earns the government no revenue. It served its purpose by encouraging the elder generations to yield their power over the family businesses before they die.

ghouse 9y ago

With a exemption on the first $22 million gifted to your brother by your parents after the surviving spouse dies, I don't think this fits the definition of "small" or "in the middle."

logfromblammo 9y ago
Incorporate the business. The parents as the majority owners on the board elect the brother as CEO. The brother appoints siblings to executive positions. The executive salaries include stock grants. The company then trades shares of stock for life annuities of equivalent present value. Essentially, the company starts a pension plan for its owners. As long as they still live, the parents take pension payments, in lieu of dividends or distributions, and the kids gradually build up equity by "working" in their executive positions. The pension benefit appears as a liability on the balance sheet, depressing on paper the basis of the privately-held company stock. When the parents die, their beneficial interest in the form of the life annuity is terminated immediately, without any intervention by an executor or probate judge. That cash flow from the company is now freed up for dividends. The value flies from the present value of the life annuity to the stock price of the company that no longer has to pay it, just as the last breath leaves the body, so fast that the taxman cannot catch it. The kids will realize a capital gain if they ever sell their stock, and will see a rise in dividend income going forward. This increase in wealth would be the same size as a normal inheritance, but does not trigger taxation until they sell the stock, and avoids estate taxes entirely. Income tax is paid quarterly. This is fine. The estate tax earns the government no revenue. It served its purpose by encouraging the elder generations to yield their power over the family businesses before they die.