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Estate Taxes And the (Clinton) Family Business
Timothy Carney of the Washington Examiner recently wrote:
The Clintons may be stupid-rich, but they aren’t stupid—they’re using estate-planning techniques to avoid the estate tax. Bloomberg News reported in 2014 that the Clinton family home has been divided, for tax purposes, into two shares, and those shares have been placed in a special trust that will shield Chelsea from having to pay the estate tax on the full value of the home when she inherits it. Also, the Clintons have created a life insurance trust—a common tool wealthy people use to provide liquidity for heirs to pay the estate tax.
He continues:
The Clintons’ games, and the estate-planning industry’s interest in the tax, highlights how the tax fails at its stated aims of preventing the inheritance of wealth and privilege. Instead, the estate tax forces the wealthy to play games in order to pass on their wealth. These games don’t add anything to the economy, they just enrich the estate-planning industry.
Those whose wealth is tied up in a small or medium-sized business, on the other hand, aren’t always capable of playing the estate planning games.
Indeed. But, aside from the hypocrisy of the Clintons, what stood out to me was the description of how the tax “fails at its stated aims of preventing the inheritance of wealth and privilege.” These words, or variations thereof, boil my blood.
The aim of the government should be to enforce rules of the game, as a referee would. A referee has no business hobbling any player to benefit one team over another. Ensuring that players have equal opportunity does not entail penalizing certain players from having excelled due to the opportunity presented to them by the rules of the game.
Furthermore, the business of tax collection should be to ensure that the state has sufficient resources for expenditures for the common good – not to mold society in a particular way. And assertions that the government has altruistic motivations for confiscating families’ wealth remind me of the entreaties seen on notices in hotel bathrooms. Help “save the planet” they say, asking guests to refrain from having their towels laundered. Hotels play the eco-card in order to save money on labor and utilities, just as government plays the equality card in order to justify its greed.
Passing on wealth to one’s heirs is a profoundly private decision. Some — such as as Bill Gates and Warren Buffett — prefer to leave their heirs enough assets so that they may do anything, but not so much that they may do nothing. Others may prefer to pass on all their assets, or to disinherit their children.
The truly tragic consequences of death taxes are encapsulated in the final sentence in the excerpt: “Those whose wealth is tied up in a small or medium-sized business… aren’t always capable of playing the estate planning games.” Therefore, some family businesses have to fold because the parents cannot ensure that their heirs have sufficient resources for the liquidity and capitalization necessary to keep them running.
Meanwhile, the Clinton family business keeps running. And running. And running.
Published in Domestic Policy
Like.
I hasten to add that I don’t begrudge the Clintons their wealth or their estate-planning strategies. But given that Ms. Clinton favors a higher estate tax rate and a lower exemption, the hypocrisy is irksome.
The hypocrisy is indeed irksome. But is also part and parcel with the Ruling Class of the Left, which has long had one set of rules for the masses and another set of rules for themselves. (see: Al Gore & friends)
I thought the business of a tax collector was to have dinner with Jesus?
This is one issue where I depart from conservative orthodoxy. I would eliminate the estate tax, yes. But I would tax the income to those who receive a bequest as ordinary income, just as if they had gone out and worked for the money. I can see no reason why someone who gets rich by working hard and taking risks should pay taxes, while someone else who gets rich by sitting on his or her butt until Daddy dies should not pay taxes. And please don’t tell me the money has been “taxed already.” All money has been “taxed already.” It gets taxed each time it changes hands. Except when it changes hands through inheritance.
If there is a poster child for the class of people who are least deserving of a massive tax break that nobody else gets, it is surely Chelsea Clinton.
I actually think the one thing I disagree with is the claim that small business owners can’t use some of the same tax strategies. I’m not privy to the Clinton’s details obviously, but I suspect that the “game” they played with their home is a fairly common strategy that small business owners use, or at least are advised to consider, all the time for generational business transfers. In addition, ILITs — the insurance “game” mentioned — is a basic, cheap, and nearly universal strategy used by anyone with a life insurance policy and an estate that’s in danger of being taxable upon death. As far as those two items go, you’re really just kvetching that they went and actually worked with a competent estate planner. But it’s something anyone with an estate in the $5 million or more vicinity ($10 million for a couple) should be doing unless their legacy goal is “give it to the government.”
The foundation is a rarer and higher end estate planning tool I grant you. You not only need a lot more money for it to make it make sense, but you need liquid assets. It’s not terribly suitable for a family business unless it’s going to be sold pretty promptly upon death.
And yes, the world would be a better place with no estate tax. We could then redeploy all the talent devoted to avoiding that tax to a socially productive use. I’m not denying that. Simply saying that the Clinton’s have simply done what most people in their position with any financial/legal sophistication would have done.
“Furthermore, the business of tax collection should be to ensure that the state has sufficient resources for expenditures for the common good – not to mold society in a particular way.”
This notion seems to be a recent innovation.
I’m currently reading “Securing the West: Politics, Public Lands, and the Fate of the Old Republic, 1785-1850” by John R. Van Atta. It’s turning out to be the best, most comprehensive book on the subject that I’m aware of.
It’s interesting to read about how some of the Founding Fathers were using land policy to mold society in particular ways. Jefferson in particular wanted to use government policy to hinder concentrations of wealth, while Hamilton thought such concentrations could be used to advantage.
Excellent. The problem I have with the estate tax is that it looks more like confiscation than other taxes. Property taxes are a small slice of value meant to pay for schools and local government. Income and capital gains taxes are a tax on the increase. Estate taxes apply to every thing, down to the change in your pocket when you kick off. When the tax kicks in, they want half. The Democrats want a lower exemption and higher rates. Pure demagoguery.
We have had robust estate taxes since the 1930’s, and they have not prevented great fortunes from being passed on or collected much money. But they have diverted fortunes to government-approved charities and byzantine trusts. The Warren Buffet fortune will pass to charity largely free of estate and capital gains taxes. The Kennedy fortune was tied up in complicated trusts starting 90 years ago and passed to family largely free of estate taxes.
You don’t understand. You didn’t build that. It’s all the government’s anyway. They just let you use a little of it while you’re here — because they’re so benevolent. It’s only fair that you give it back when you’re done. :)
Like the Clintons, our governor here in MN has all of his wealth tied up in trusts in South Dakota. Of course his father set that up to pass the money on to his son, who has never worked a day in his life but keeps getting elected by the sheeple because his name is Dayton.
But hypocrite Mark has no problem jacking up taxes on the producers in our state, including confiscating half of someone’s business via the inheritance tax. Liberals are all the same – they will tell the people anything to get power in order to deprive hard working patriots of the fruits of their labor.
(can you tell I just went through tax season?)
That’s a fair point, except for the part about my “kvetching that they went and actually worked with a competent estate planner”. (See comment #2.)
Effective estate planning is a significant obstacle for many. Not only does it cost money, but it requires the expertise of a competent attorney, as you indicate. Some folks are not sophisticated enough to pursue a plan before death, but even those who are may not receive high-quality help in putting in place an effective plan. I have seen, firsthand, errors made by allegedly expert estate planners who used boilerplate, one-size-fits-all legal approaches dressed up in leatherette binders.
Instead of blaming the victims, I say, get rid of the vile death-tax.
I agree with you about the death tax, as well as the varying quality of estate planners/lawyers. I don’t have much sympathy for someone with north of $5 million bucks being too cheap to see a planner at all, but I grant you that even someone who goes to the effort and expense can wind up disappointed if they wind up in the hands of someone who’s not very proficient, and further that it can be very difficult for the non-expert to tell the difference. The good news is that if you’re not north of $5 million bucks, you’re safe, at least from the federal estate tax. Of course there are other costs of dying too that a good estate plan will minimize, but that’s another subject.
This is the kind of value judgment that the government has no business making. Some may get “rich by sitting on his or her butt until Daddy dies.” Some may get “rich by working hard and taking risks” and then get even richer when Daddy dies. Some may sit on his or her butt and then be disinherited by Daddy. It’s shouldn’t be anyone’s decision except Daddy’s (and/or Mommy’s).
Furthermore, I would prefer for assets to pass from a hard-working risk-taker to his layabout heir than for those assets to disappear into the maw of the feddle gummint. The layabout will not keep the cash in his mattress; he will invest it, providing capital for hard-working risk-takers like his parent(s).
As of right now. But hasn’t the floor sometimes been as low as $1 million? The floor at which taxation starts goes up and down at the whim of Congress. You really want to try timing your death so that it corresponds with a Republican majority.
It was below $1 million at one time. This goes back quite a ways, but I remember it being something like $600K.* That’s got to be in the 80s, and I don’t recall exactly when it went to $1 million. Maybe it was the ’86 tax reform act. But it stayed at a flat $1 million for a very long time and only started increasing under a law W signed in 2001. It increased every year or other year (I forget) all the way to 2010, when for one glorious year, there was no estate tax. I think George Steinbrenner famously picked that year to die. Lucky bastard. Then it was set to plunge back to $1 million again in 2011, but Obama signed a compromise tax plan that basically established the new regime. It started out at $5 million in 2011 and has been indexed to inflation since then. It’s around $5.4 million for 2015.
* I’m sure it was below $600K at some point too. But that would be outside the range of my memory. I’m old, but not that old.
What a wonderful environment in which to be trying to formulate an estate plan.
*Connections* and *credentials* (which may be acquired in significant part through the use of connections) are not taxable as part of an estate. Even if the Clintons could leave nothing at all to Chelsea in cash or property, the above two factors would be sufficient to ensure that she becomes a very wealthy woman.
The owner of a family farm or manufacturing business is unlikely to be able to transmit wealth in this fashion.
It was real chaos on 2010 with people thinking we were going from no estate tax to 45% or whatever it was on everything over $1 million. That’s a lot of people with estates north of $1 million, and a lot of money at stake. The sort of thing that focuses the attention.
Some would say that all of us who grow up in stable families, in stable communities and get good educations etc. do this to some extent when compared to the underclass. It’s not to the same degree as the Clintons, but all parents do leave legacies to their children (some good/some bad) that are beyond the IRS’s reach.
Let’s repeal the estate tax and replace it with a 19% flat tax with a similar exemption and a deduction for the decent’s basis in estate property, indexed for inflation. As part of general tax reform and simplification, it would have broad appeal, because:
1. A tax on real gains is not confiscatory and not double taxation;
2. A low rate makes complicated avoidance schemes less attractive and may raise revenue (Remember the Laffer Curve? It works when rates are high enough.);
3. Family businesses could more easily plan for it without selling the business;
4. Replacing the estate tax by closing a huge loophole in the tax code would answer the inevitable claim that it is a tax cut for the rich; and
5. Even amoung middle class voters, the estate tax is not popular.
I floated a similar idea in a post a while ago and have been waiting for candidates to come up with some viable sounding proposals. I am still waiting.
By decent do you mean decedent?
This sounds promising, and I have wondered about reforms like this myself. However, it’s hard to get excited about tax reform when the real problem is spending. We need spending cuts or we can kiss our remaining constitutional rights goodbye.