No Estate Tax In 2010 Means George Steinbrenner’s Family And Others Will Save Millions In Taxes

There are two things that are sure in life – death and taxes.  And when you die, those two things could intersect.  If your estate is worth $1 million dollars or more –  your estate could be taxed up to 55% starting in 2011.  Many people like to call it the “death tax”.

This year was the first year that the estate tax has lapsed since it was enacted in 1916. America’s first billionaire – John D. Rockefeller – was taxed at a 70% rate when he died in 1937.

Estate Tax Expired In 2010

At the end of 2009 Congress found itself paralyzed and unable to act. The result is that the estate tax ended up expiring. For the current tax year, 2010, the estate tax is no longer in effect.  It will go back into effect next year.

For the families of several wealthy people who died this year, the estate tax lapsing means that they will end up saving millions (or billions) of dollars in taxes that would have been levied had their loved ones died in 2009 or 2011. One of the most recent examples was George Steinbrenner.

Steinbrenner passed away just over a week ago, leaving an estate estimated to be worth over $1.15 billion dollars. If he had died next year his estate would have been taxed at the 55% rate, meaning the family would have lost over 500 million dollars to estate taxes. Since he died this year, however, when the estate tax was no longer in effect, his family will save over half his fortune.

In life, George Steinbrenner beat the Red Sox. In death, he beat the IRS.

Steinbrenner’s death on July 13 occurred six months after the federal estate tax expired. Forbes magazine estimates the Yankees owner’s net worth was $1.15 billion, so the timing of Steinbrenner’s death could save his heirs up to $500 million in federal estate taxes.

But future heirs may not be so lucky. The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say.

Another billionaire’s family saved even more money because their loved one died in 2010.  They saved several billion that would have otherwise gone to the government.

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.

Arguments For And Against The Estate Tax

The estate tax has been extremely controversial since it was enacted, and it has been a political football for years.

Those in favor of the estate tax say that it is important to have the tax as it helps to give opportunity to others who aren’t wealthy.

“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffett and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”

On the other hand, those against the estate tax say that it is an unfair tax because it essentially taxes the same income twice.  Once when you earn it, and once when you die.  If the estate tax isn’t updated it could be increased from 45% to 55%, and the threshold lowered to $1 million dollars.  That means it could affect far more people than just the wealthy.

But future heirs may not be so lucky. The federal estate tax is scheduled to return with a vengeance on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. And the same congressional paralysis that allowed the tax to expire in 2010 could thwart efforts to pare it back, estate planning attorneys say.

A $1 million exemption would affect a lot of families that are well out of Steinbrenner’s league. “You take a home, an IRA or 401(k) retirement account, some other savings and you get to $1 million pretty easily,” says Richard Behrendt, senior estate planner for Robert W. Baird and a former IRS attorney.

Families who live in areas with high property values are particularly vulnerable, says Clint Stretch, tax principal for Deloitte Tax who lives outside Washington, D.C. “People in my neighborhood bought a house for $32,000 in the ’60s, and now it’s worth $1 million,” he says. “If they’ve got anything else, they would be paying an estate tax.”

So a lot of families who have family homes that have appreciated over the years, and a few extra assets could end up losing over half of what they’ve earned over the years. To me that just doesn’t seem fair. At the very least I think the estate tax needs to be updated so that it truly doesn’t affect families with small businesses or families with homes that have appreciated. If I were really pressed I think I would ask for the estate tax to be repealed altogether. It just doesn’t seem right to take money from people who have earned it through nothing but their own hard work and ingenuity.

What do you think about the estate tax? Do you think it’s a good thing that helps to spread economic opportunity, or is it unfair double taxation that isn’t just? Tell us your thoughts in the comments.

Originally published at biblemoneymatters.com.