Trump’s Estate Tax Plan, Should You Be Worried?

Part of Trump’s tax plan is to eliminate the Estate Tax, otherwise known as the Death Tax

As an appraiser this has a small impact on my business, as I do a few estate tax valuations each year.  If this goes through I stand to lose a bit of work, but I’m excited for the prospect that there may be changes.

Why is that?  Well, I think that the estate tax valuations that we do are complete BS.  Seriously, let me walk you through the process and you can decide if what we do is actually something that is needed by society.  The first step in sheltering assets from the Estate tax is for a lawyer or estate planner to set up the assets in a complex legal entity, such as a Family Limited Partnership (FLP).

What’s an FLP?

The estate planner will move assets into a company which will have ridiculous rules that aren’t designed to manage the assets properly, they are purely there to set up the opportunity to lower the estate tax.  Here’s an example of how it would be set up:

Let’s assume that the father has a piece of land worth $10 million and that is the only asset.  This exceeds the 2017 limit of $5.49 million, so $4.51 million of the land is subject to the estate tax.  To make the math easy we will assume a tax of 50%.

Assume there is a father who owns the land and his son.  Assume that the land is rented as a parking lot with no expenses and generates revenue and profit each year.

The asset is placed into the FLP, and that FLP’s rules are going to be governed by the partnership agreement drawn up.  This agreement is written purely as an exercise to lower the potential tax burden of the estate tax.  The father will be declared a 1% owner of the FLP, while the son will own 99% of it.  The rules will state that the 1% owner has full control of the business.  With full control of this business the 1% owner chooses to take all of the profit personally.  The 99% owner receives nothing.  The son has no control and no income in this FLP agreement.

The next step is that they hand this FLP agreement to an appraiser and say we would like you to appraise a 1% undivided interest in the land given the draconian rules set up under the FLP agreement.  The appraiser’s job is to come up with a value that represents any 1% of this property.  Well, what if there is only one entrance to the parking lot?  Which 1% is that?  If we assume that the 1% doesn’t have control what is the level of profit that they will receive?  Is it zero or is there some potential that the controlling interest won’t squander all of the profit and will distribute it to the other owner?

The appraiser then uses these reasons to formulate a discount to the property.  Let’s assume that the discount calculated is 50%.  Magically this piece of property is now worth $5 million.  What’s that?  That’s below the estate tax threshold?

Now the CPA fills out the estate tax form and says that the decedent’s assets were under $5.49 million and therefore no tax is due.

The IRS is out $2.25 million in taxes, and all they had to do was pay for a new entity to be formed by the estate planner/lawyer, hire an appraiser, and have their CPA fill out a form.  Clearly those costs would be a tiny fraction of what they would have handed over to the IRS.

Does the Estate tax work as planned?

You know what else is BS?  You pay taxes on everything you earn in your life, does it make sense that the IRS gets to tax it again upon your death?  Some people take the stance that it’s necessary to pry the hard earned money out of the hands of those that earned it.  Others use another tactic to avoid the estate tax, but they are so sneaky about it that they fool the common folk.

Take the case of Bill Gates and Warren Buffet.  These guys have pledged to, and have already started, the process of giving away their vast fortunes.  That sounds so awesome in the headlines right?  What a bunch of true heroes.  Well, are they truly altruistic?

If they give away all of their money to “charity, or education” how much does the government get when they die?  What’s that?  Is it $0?  Yep, they have chosen to not allow the government to tax their money twice by giving it away.  Are they true patriots?  Or do they just see a government scam and have a way to sneak around it?

Let’s go through an example of what should happen if Bill Gates or Warren Buffet play by the rules and pay the estate tax upon their deaths.

Assume that my fortune totals $1 Billion to make the math easy.  Assume that I have one son who would inherit my fortune.  Again, for the math let’s assume no exemption and that the estate tax is 50%.

Upon my death, my son becomes the owner of $1 Billion.  He then fills out the estate tax and writes a check to the IRS for $500 Million.  He’s still a happy kid as he has $500 million left.  He enjoys a nice life has a daughter and upon his passing he leaves her with $500 million.  She then writes a check to the IRS for $250 Million.  She lives a nice life an passes her $250 million on to her son, who writes a check to the IRS for $125 Million.   After about 5 generations the IRS will have confiscated almost all of the original fortune.  In fact, after three generations the IRS has $875 Million of it (87.5%) of the original fortune.  Not bad for them huh?

Now are Bill Gates and Warren Buffet dumb enough to allow the IRS to steal their fortune?

No, they are going to decide how they give it away rather than just handing it to the government.  Have you ever been to a college campus?  Do you find it odd that every building has someone’s last name on it?  Well how did those names get there?

Rather than just give my money to the IRS I’m going to donate it to my undergrad.  I’ll tell UC Berkeley that I want them to build a building called the Landreth School of Finance.  The name will never be allowed to change, and the funds to upkeep and eventually replace it will be in the endowment I leave them of $1 Billion.  In addition, my family members will be in charge of the endowment perpetually.

Do you see what I have done?  I just set up a perpetual legacy for my family that includes income for all of my descendants.  How do I guarantee all of my descendants will receive income?  They will serve on my endowment board and get paid for handling the duties associated with the management of this responsibility.  They will determine how much each member needs to be paid and they will determine their raises into perpetuity.  If inflation goes up my great grandson will just give himself a big raise that year.  Oh did I mention that that building and all future ones from my endowment will be called the Landreth School of Finance?  A thousand years from now that will still be there.

In my “altruistic” donation example, I established a legacy and allowed my descendants to keep a huge portion of the money, whereas in the IRS example the government ends up with almost all of the money.

Conclusion

Even though I, as an appraiser, would potentially lose income from a world with out an estate tax.  I am 100% for the president’s plan to take it out of the tax code.  We as a society want to punish the super rich for being so successful.  I get that jealous feeling that we have, but the estate tax isn’t the way to do it.  In fact, the super rich have outsmarted the media and common folk by so much that we think that they are our heroes for being so “generous” and giving away their fortune.  Will you be surprised when you find out that there are going to be a lot of Gate’s buildings and endowment funds that will keep his legacy going forever?

We will be happy to hear your thoughts

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