Furthermore, TPC estimates those roughly 80 estates will owe less than 6 percent of their value in tax, on average. TPC’s analysis defined a small-business or small farm estate as one with more than half its value in a farm or business and with the farm or business assets valued at less than $5 million. Only roughly 80 small business and small farm estates nationwide will face any estate tax in 2017, according to TPC. Only a Handful of Small, Family-Owned Farms and Businesses Owe Any Estate Tax Ī top estate tax priority for policymakers should be to eliminate loopholes such as these. The tax lawyer credited with discovering the loophole estimates that it has allowed wealthy estates to avoid as much as $100 billion in estate taxes since 2000, or close to one-third of the amount that the tax raised over the period. The GRAT loophole enables wealthy estates to avoid extraordinary amounts of tax when stock or other assets rise in value quickly, as has happened frequently in recent years. Such techniques have been described as a “heads I win, tails we tie” bet. If the investment doesn’t rise in value, the full amount still goes back to the estate. If the investment - typically stock - rises in value any more than the Treasury rate, the gain goes to an heir tax-free. The estate owner puts money into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years. These strategies don’t benefit the broader economy they only allow the wealthiest estates to avoid taxes.įor example, some estates use grantor retained annuity trusts (GRATs) to pass along considerable assets tax-free. Many wealthy estates employ teams of lawyers and accountants to develop and exploit loopholes in the estate tax that allow them to pass on large portions of their estates tax-free. Large Loopholes Enable Many Estates to Avoid Taxes Further, as explained below, estates use large loopholes to avoid considerable amounts of tax. Second, heirs can often shield a large portion of an estate’s remaining value from taxation through generous deductions and other discounts that policymakers have enacted over time. First, estate taxes are due only on the portion of an estate’s value that exceeds the exemption level at the 2017 exemption level of $5.49 million, a $6 million estate would owe estate taxes on $510,000 at most. The effective rate is so much lower than the top rate for several reasons. (See Figure 2.) Claims by repeal proponents that the estate tax consumes nearly half of an estate’s value are therefore false. That is far below the top statutory rate of 40 percent. Taxable Estates Generally Pay About One-Sixth of Their Value in TaxĪmong the few estates nationwide that owe any estate tax in 2017, the effective tax rate - that is, the share of the estate’s value paid in taxes - is less than 17 percent, on average, according to the Tax Policy Center (TPC). Batchelder explains, “it would be more accurate to call wealth transfer taxes ‘silver spoon’ taxes, not ‘death’ taxes as their opponents prefer.” 2. As New York University School of Law professor Lily L. Thus, the estate tax is best characterized as a tax on very large inheritances by a small group of wealthy heirs repeal would amount to a massive windfall averaging more than $3 million apiece for the top 0.2 percent, and more than $20 million for the wealthiest estates. (While this paper focuses on the federal estate tax, taxes on inherited wealth are also a traditional and common revenue source for states. This report briefly describes ten facts about the federal estate tax. The estate tax has been an important source of federal revenue for a century, yet a number of misconceptions continue to surround it. The estate tax thus limits, to a modest degree, the large tax breaks that extremely wealthy households get on their wealth as it grows, which can otherwise go untaxed. The estate tax limits the large tax breaks that extremely wealthy households get on their wealth as it grows, which can otherwise go untaxed. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level - $5.49 million per person (effectively $10.98 million per married couple) in 2017. The federal estate tax is a tax on property (cash, real estate, stock, or other assets) transferred from deceased persons to their heirs.
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