On Tax-Planning, The “Death Tax”, and King Lear

estate tax
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Early in my legal career, I was asked to help a couple with some estate planning. They owned and operated a jewelry store and had been quite successful as they owned the building in the downtown of a decidedly upscale Chicago Suburb. Now, this was so early on, that the numbers I use are underwhelming but realize they have to be multiplied by 2-1/2 to 3 times for today’s money. They are for purposes of illustration… and they work out so nicely.

My clients operated the business with their two sons and owned a house in a neighboring suburb and a house in Florida. They wanted a plan which would allow them to limit their exposure to inheritance taxes as much as was legal. At that time, Federal Estate Taxes were payable on estates in excess of $600,000.00 and, starting at about 39.8%, were a formidable part of any estate plan.

So, the first $600,000.00 of a person’s estate THEN was not taxable. The Federal Government allows married people to claim that exemption for each of them. To do so, they have to hold their share of the estate in their individual names, not a joint tenancy. The name given to this instrument is a QTIP Trust. No, it is not for cleaning your baby’s ears. It stands for QUALIFIED TERMINABLE INTEREST PROPERTY. By creating such a trust, taxes on the first person to die are far lower and often can be carried over to the death of the second party, allowing the survivor to have more funds available.

The catch is that the property has to be divided up between the two parties.

Quick descent into the subject of Inheritance Tax, which rich people (and their politicians who are also rich or aspire to become so while in office or shortly thereafter) started calling THE DEATH TAX. The idea was to get people to think that they were being punished even after their death — and the term “DOUBLE TAXATION” was thrown about freely and incorrectly. Far from being double-taxed, most of the wealth which would be passed having never been taxed. The Congressional Budget Office estimated that 83% of the money subject to inheritance taxes had NEVER been taxed — because it was Capital Gains that had never been subject to taxation. You bought a lot of MICROSOFT early on and became rich? Rich on paper but no taxes until you sell the shares. Even the Republicans under Bush II when Karl Rove festered and was pushing to abolish any impediments to this enormous wealth pass-through, Congress believed that they would at least have to tax this wealth at capital-gains rates. Can’t believe the media doesn’t take Trump to task for the $Trillion give back to the rich on his health care plan nor the plans to abolish the Inheritance Tax. The ultra-rich have avoided this even single taxation in the past by transferring their wealth to some type of foundation which serves as an employment agency for their kids and allows them to appear less venal and more charitable. Enough on that subject.

Next week we will tell you about my clients soul-searching on the QTIP and the real story behind the angst I could not have known I would create with my suggestions.