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Flawed Laws

"Alas for you lawyers also! You load men with intolerable burdens, and will not lift a finger to lighten the load." Luke, Chapter 11, v. 26, The Revised English Bible, 1997.

Our legal system can be both simpler and better. Read about the problems we face, how we got here, why we should be concerned and generally what can be done to improve the situation.

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Super Rich and Estate Taxes

Big news was made recently by Warren Buffett concerning his contribution of most of his fortune to charity, primarily to the Bill and Melinda Gates Foundation. Many laud this decision for the philanthropy. Indeed, many of the "super rich" (as I would call them) have for years supported the Federal estate tax and have made significant gifts to charity. However, all of this may not be as altruistic as it seems.

The message to some extent is that these people can do a better job of spending money on worthwhile projects than the government can. Thus, some of the effort is to keep the government from getting its hands on the money these people have made. However, even more interesting are planning tools which can be used to avoid paying the Federal government tax money.

Many people who are doing estate planning and who want to make substantial charitable gifts consider using charitable remainder trusts. Often the desire for using such trusts is to save capital gains tax, rather than to benefit charities However, there is

I have not reviewed the Bill and Melinda Gates Foundation documents and am not suggesting that the foundation is a charitable lead trust. I have mentioned this foundation and the planned gift by Warren Buffett only because they have been in the news recently.

Also, the discussion of charitable lead trusts does not go into the many complications which can arise because of the complexity of our tax code. The purpose of this discussion is to show that the argument to retain the estate tax in its current form in order to redistribute wealth of the super rich is in many regards a ruse.

a more interesting tool which is really available only to the super rich. This tool can allow for passing on substantial estates at a fraction of the apparent tax cost. The tool is a charitable lead trust. Such trusts should only be used by people who can afford to do without a substantial portion of their income for an extended period of time. As noted in the box above, the tool also has many complications not discussed here.

A charitable lead trust provides income to a charity for a stated period of time with the remainder going to someone other than a charity, usually descendants of the person who formed the trust. With a long period, 20 to 25 years, for paying income to charity, the effective blended estate and gift tax on the property transferred can be as little as 13.5% to 15.5%. This is far less than the nominal maximum federal estate tax rate of 45% (the lowest rate to be achieved under the Bush tax cuts).

Yet a person who has substantially less wealth, say $10,000,000, primarily in a family business or farm will pay an effective tax rate at the same time of over 29% or roughly double what the super rich might pay. In the process, the family may have to sell all or a substantial portion of the family business or farm.

Congress is addressing the problem faced by small businesses by raising the amount which can be sheltered under the unified credit and by taxing a limited additional amount at capital gains rates. Possibly the best thing to do would be to tax all transfers of wealth, whether by sale, gift or inheritance, at capital gains rates. Doing so would allow us to simplify the estate and gift taxes and make wealth transfer more sensible economically. The government might also effectively raise the same amount of tax with less trouble and at lower costs. This concept is one of many I have included in the tax code proposed in Let's REALLY Change Taxes.

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