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Warren Buffett: Don’t Repeal the Estate Tax

This article was written by in Taxes. 40 comments.


If you are lucky enough to inherit (for example) $10 million in property or investments from deceased relatives, you are also lucky enough to pass a good portion of that to the government in the form of estate taxes. It is kind of a strange concept. Why should that money be taxed? It is simply a gift from one person to another, not a gift to the government. The basic argument in favor of the estate tax is that it helps to prevent massively wealthy families from avoiding tax on their main source of income, generation after generation. The existence of the estate tax also encourages charitable giving, as that is a way to avoid this particular tax.

Opponents of the estate tax often call it a “death tax” to stir emotions and create a political issue. Warren Buffet has is critical of the “death tax” term and is a strong supporter of the estate tax.

The billionaire investor has been an outspoken critic of efforts to repeal the estate tax and in testimony at a Senate Finance Committee estate tax hearing on Wednesday, he told lawmakers that you’d have to attend 200 funerals to be at one where the family of the deceased would owe estate tax.

So it sounds like the families that were intended to be taxes on their estates end up avoiding the tax while still passing along their wealth. Those who want to repeal the tax argue that it hurts farmers and family business owners whose property or business is passed down from one generation to the next, and need to sell part of their business to pay the bill.

Buffett provided suggestions for improvements to the estate tax that will ensure that those passing on their wealth fairly contribute to the government while protecting family-owned businesses.

File this under the category of “problems I’d like to have one day.”

Update: On Advanced Personal Finance, KMC explains why the estate tax is the most misunderstood tax.

Do you think the estate tax should be repealed?

Buffett: Phrase “Death Tax” is “Dead Wrong” [CNN Money]

Updated November 16, 2007 and originally published November 15, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 18 comments… read them below or add one }

avatar The Saving Freak

The term “Death Tax” is only wrong if your assets can be easily sheltered from the tax. In Buffets case his empire can be put into trusts. But for those who run family businesses the business can be hard to shelter. The land, customers, capital, etc. may be worth $10 Million but it cannot be tapped for that amount, at one time, very easily. So for this instance the business or farm gets taxed for the proprietor dying. Thus the term “Death Tax” does apply in many instances. I think Buffet has become so sheltered from the real world he doesn’t realize what the little entrepreneur has to go through.

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avatar FMF

Where are you getting $10 million from? The actual number where estate taxes kick in is $2 million. From the article:

“Under current law, estates worth up to $2 million this year and next will be exempt from federal estate tax, and portions of an estate above that amount would be taxed at 45 percent.”

My main issues with the estate tax are:

1. It’s often double taxation — I’ve already paid taxes on those assets (at least many of them) and now my family needs to pay again.

2. It is a penalty for those who have worked hard to get ahead — just to have a big chunk of it taken from their family when they die.

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avatar EasyE

The estate tax actually penalizes people for having family run businesses. If someone wants to pass a business along to a family memeber who has helped run the business their whole life what say should the government have in that? Buffett is just falling pray to his guilt of making his money the easy way without working hard. What about all the family farms that are valued in the millions if sold off but operationally barely produce enough income to scrape by? Are we supposed to tell the children of multi-generational family farms, “To bad, you can’t farm any more, you’ll have to sell to pay the estate tax.”

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avatar Jeremy

I don’t think it should be repealed, but it certainly needs to be modernized. As already mentioned, some of the biggest losers to the estate tax might not be those who are incredibly wealthy in terms of money, yet have a lot of assets tied up into a family business.

It isn’t right that someone who started a business 40 years ago and over the years grew and became successful will have to pay a huge tax bill upon their death just to pass on ownership to their son or daughter to continue the same business.

That business has been paying taxes ever since it has been in existence, so there is no way it should be included in an estate.

I guess you could argue that this is a good example of why you should incorporate a successful business, but that isn’t always ideal or possible.

So, I think there has to be some clarification on what types of assets are subject to the estate tax, and the minimums need to be raised (which they are over the next few years, thankfully).

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avatar Luke Landes ♦127,480 (Platinum)

FMF: The $10M was just an example. I was not making any reference to a minimum amount. I’ve added some wording above to make that clear. $10M is above $2M, so the example is valid.

EasyE: I would say Buffett worked pretty hard for his money. He did not inherit his wealth, he built it through wise investments in companies. Did he work as hard as a miner toiling underground every day to scrape by for a living (as an example)? I don’t know, but he didn’t inherit it.

Also, his point in the article is that if the estate tax could be redesigned so family business are not hurt but those inheriting massive wealth pay their “fair” share, that would be the optimal condition, just as Jeremy mentioned in the comment above. I suppose I didn’t make that clear in the post.

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avatar EasyE

I didn’t mean to imply that he inherited his wealth. But investing in other peoples businesses is a little different then building them from the ground up, involving your family, and hoping to one day pass that business on so that they might survive by it.

But isn’t a bussiness creating jobs and paying taxes contributing to the government anyway. Even an individual passing on his wealth shouldn’t be subject to government intervention. If that is the concern then the fairtax could easily take care of that.

And according to Wikipedia, Warren Buffet didn’t exactly grow up poor, the son of a stock broker and U.S. representative. I don’t knock what he has done, but it is a little ridiculous to say that someone can’t pass their wealth on to their children without paying an enourmous amount of it to the government but can go right ahead and blow it all on anything else they want.

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avatar KMC

@EasyE & FMF – I think you guys may have bought in to the propaganda.

The American Farm Bureau, not exactly a disinterested party in the debate, could not cite a single example of a family farm being lost due to the estate tax.

A couple of other facts:
USDA’s research shows average small farm worth a little over 500K; large farms around 1.5M.
Average worth of small businesses is around 700K. Only 4% of small businesses are worth more than 3.5M

It’s entirely possible farms, businesses, and everyone else would face higher taxes because of a repeal.

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avatar FinanceIsPersonal.com

I think the estate tax should be repealed, as well as every other tax in this country. I know, most people think I’m crazy, but we should be able to decide how we spend our money. It’s not right for a group of strangers to take your money without your permission and spend it as they please.

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avatar John

I for one think the estate tax should be done away with. How does this ridiculous tax create an incentive for people to get ahead? I pay taxes throughout my working career (both payroll and property) and then because I die my heirs have to pay up to 55% of the value of the estate in taxes. That’s insane. If they want to continue to collect enough taxes they should just increase taxes on properties/investment income or whatever to offset. Those of us who own houses are not far off the $2M limit if we manage to save 15% in our 401Ks.

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avatar Zook

Of course I would love for the estate tax to go bye-bye, but then what would estate planning attorneys do? :o). Seriously, I think the start to abolishing this is to have the initial $2mil maximim increased and then much like there are increases for the Roth and 401k based on CPI or inflation, so should the estate tax. I believe 2009 is a great year to die because the maximum increases to $3.5mil, but in the following couple years, reverts back to $1mil. This NEEDS to be addressed by Congress, who have become wet noodles over the past year or two.

We all might want the estate tax abolished, but I want to go to the moon too. I think increasing the limits is a start, then maybe in the future the federal aspect could go away and leave just the state estate tax.

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avatar Jeremy

Whether we like the tax or not, there has to be an estate tax of some form. In its current system, it is terrible, but without it, it would be the greatest tax loophole of all time.

The reason is that you can’t just let assets appreciate in value indefinitely. A family home or property that gets passed down from generation to generation, which could mean millions of dollars in gains that are never taxed. With a loophole like this, it will only further perpetuate wealthy families sheltering assets. If ownership is transferred while the owner is still alive, they pay taxes on the gain, so why should transferring the asset to a family member be completely exempt?

That being said, the system is horrible right now in the fact that it just takes a gross tally of assets, minus a few deductions, and slaps on a ridiculous tax rate on it. That is the worst solution.

If a more appropriate estate tax was in place that allowed for higher limits and additional deductions for assets that are required by the family for income purposes (such as a business) and determine a more fair way to assess tax on the assets that are transferred upon death, then that is a step in the right direction. Of course in doing this, you’re creating an even more complex tax law that IMO should be done away with altogether.

There is no easy answer, but the current system is broken, and eliminating it altogether isn’t the ideal solution.

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avatar Yana

Yes, I think the estate tax should be repealed. We are all subject to enough taxes, and neither the rich nor the poor should be singled out and especially punished. Being anti-rich is no better than oppressing the poor.

As far as your list of problems you’d like to have one day, I do find humor in the statement, but at the same time can tell you that it is hell to settle an estate. Luckier is the one who has a lot to gain for having to do it. I also would urge anyone who has heard that one should get a living trust as opposed to a will to read up on the subject before making a decision. Probate is a dreaded word, but is not that bad. Incorporating for business is an appropriate use of a dummy entity, but creating trusts to replace human heirs with personal names is an invitation to complications that are very stressful to people dealing with death. My opinion is that trusts are something of a scam, and their legitimate and beneficial use is quite limited. There are other ways to do things that lessen the headaches.

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avatar Foobarista

The simple fix is to make death an event without tax implications. This has effects on both sides: unrealized capital gains pass through to heirs (which they currently don’t), and other tax liabilities should be inherited along with the estate.

Another problem is that depreciation “clocks” shouldn’t “reset” upon death either, which they currently do.

But there should be no separate “tax on death”.

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avatar Meg

Jeremy,

While I understand your point, I have to say that even if there were no estate taxes, all those assets would continue to be taxed. It’s pretty hard to avoid taxes on any assets. A property that continues to appreciate but is never sold (only passed down) will still generate a LOT of property taxes each and every year. And if those properties are leased, those rents are taxable too. Investment portfolios worth millions are still generating taxable interest, dividends, and even capital gains.

Estate taxes need to be repealed or really adjusted. I agree that people who aren’t “that” wealthy in terms of cash flow are unduely punished by this tax. We all like to think of those affected by this tax as incredibly wealthy people who don’t work with multiple homes who fly around the world on their jets. It’s just untrue.

It’s common for a family to accumulate $2M-$5M in assets which may be dominated by one small business or one big homestead. Just because those families are “wealthy” doesn’t mean they have lots of income or even a hugely luxurious lifestlye. Even if the assets are all sitting in a stock fund, why should the government take HALF of that money or more when you die???

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avatar Living Off Dividends

I think Buffett is wrong.

he thinks the estate tax is a form of social engineering and should be used to prevent rich from getting richer.

Thats fine, except that there isn’t anything wrong with the rich passing their wealth down to their heirs. They don’t owe society anything.

The idea that the rich owe it to society and hence should be forced to redistribute their wealth accordingly is socialistic. The rich are that way because they work harder than most people. If they don’t their wealth is “redistributed” back to society within a generation or two. You don’t need taxes for that.

The only thing that estate tax fosters is sheltering of wealth in offshore assets. Atleast thats what the really wealthy do.

Its only the poor smucks who’re worth slightly more than the cut-off who get screwed.

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avatar JD

How many times are we going to keep hearing about the small business owner getting screwed by this tax? Agreed that some are but it is not common. Remember that ONLY 4% of these businesses are valued at over $3.5MM and would be subject to the estate tax. They could put in exemptions for these smaller types of businesses as well that would have to be sold to pay the tax. The real purpose of the tax is to prevent America from becoming a dynastic plutocracy. You pay tax on your income right? The large estates this tax is primarily focused on ($50MM and more) typically don’t pay much tax at all on the income generated from it. The average tax rate on large family trusts is under 7%. So spare me the argument that these estates are being taxed unfairly, I make a high income and get taxed at 35% on a large part of it. I’d like to see the large family trusts pay their share as well.

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avatar acornwebworks

“The rich are that way because they work harder than most people.”

Uh…we’re talking about the estate tax here. About the heirs. About the people who *inherit* the money. How is an accident of birth ‘working harder’?

I’m certainly not discounting family members who work hard to help a small business grow. But there are already mechanisms in place to deal with continuity. If a small business owner doesn’t take advantage of them, then the owner is part of the problem. Indeed, many entrepreneurs *do* cause problems because they find it difficult, if not impossible, to separate themselves from their business. But, if the owner is concerned about continuity and taxes, then incorporation is the obvious route to go.

Personally I have considered the following data from the Congressional Budget Office and consequently find I don’t support the repeal of the estate tax:

** Only 3/10ths of a percent of the population will ever have to worry about paying estate taxes – the rest don’t have large enough estates.
** The actual paid average tax rate is 20%, not half – which is less than a ton of us pay in income taxes
** Heirs can spread out estate tax payments over 14 years – they don’t have to come up with the $$ all at once
** Estate taxes are paid only on the amount above the exemption – meaning taxes often aren’t paid on everything that could be taxed
** Most estate taxes are paid on unrealized capital gains

(As an aside, someone made a good point about taxing the unrealized capital gains on a home: “If ownership is transferred while the owner is still alive, they pay taxes on the gain, so why should transferring the asset to a family member [upon death] be completely exempt?”)

Be honest here. Most heirs of whatever size estate sell the assets so they can divide them or get the cash. They don’t want to run the family farm or business. They don’t want (or can’t afford) to keep your big house. And 99.7% of them will never have to worry about paying estate taxes…including those imaginary people some folks claim to worry about who have to sell the family farm to pay the estate taxes. If that were true, though, you’d think that, by November 2007, the American Farm Bureau Federation could have found ONE family who was forced to sell. But no. Not a one. The absolute best they can do? One family had to cut and sell 13,000 trees while the other one hasn’t been able to grow as fast as they’d wanted.

Taxes suck. But, since we’re stuck with them (FinanceIsPersonal ought to calculate what the costs to her/him would be personally should we pay no taxes, thereby not reap the benefits of what local, state and federal taxes bring to us – I think s/he’d be astonished), the estate tax is the most progressive (as opposed to regressive) tax out there.

This is not being anti-rich. It’s simply accepting…as Warren Buffett has…that the rich can afford to pay more than they do without it hurting them. And, that as long as they don’t, the rest of the population has to pay more…and it *does* hurt the rest of us.

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avatar clmjmpr

The reasoning is very reasonable and shows that those wealthy persons who want to perpetuate our nation as the proud country that has opportunity for every citizen who will work hard, and honest can become anything that he/she desires. We should be a nation that is controlled by a few ultra rich famalies. That is Warren Buffet, and a lot of other thoughtful people who want to preserve a very successful experiment and until the Bush administration where anyone can earn anything that he/she efforts. Unselfish such as Buffet understand that a nation can be succesful unless every citizen has all of the opportunity as he/she is willing to work to achieve. Success should not be restricted for only those who were born with a silver or gold spoon in their mouth. Most of the hugely successful people in the USA were persons who were born into poverty and used necessity to work their way up from the bottom of the barrel up to the top of the heap. We must guard that opportunity with all of hearts and minds for our children and their children and grand children. But if the wealth
is in the hands of the few we will be a nation wrought with anger and resentment and we will experience the type of over throwing of the nation and dictators who care only about absolute power and have no feelings for the common people. What do you want.

I also would like to you take a look at those who supported repeal of the estate tax. You can see the selfishness in every one of the people who spoke out in favor of repeal of the estate tax, and they are those who never worked for a day in their life and were born to money and want to keep the good times growing for those who deserve them. Which camp do you want to live in? Think about it.

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