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Estate Protection
"The Startling Truth of the Federal Estate
Tax"
by
Michael Vallone
Executive Director of Heritage America
The Federal Estate Tax is a reality that Americans have lived with for generations.
It is a tax imposed by the federal government upon the transfer of your assets to
your heirs upon your death. It is a very stiff tax, with rates of 37% to 55% of the
fair market value of your assets. In the past the rates have been as high as 70%!
Previously, people considered the estate tax as a tax on "rich people".
This is because anyone with an estate valued at less than $600,000 escaped paying
any tax. However, with time and continued inflation, even in moderate amounts, the
value of average American estates continued to rise until many people who never considered
themselves "wealthy" were now faced with this tax. This was further compounded
by the fact that many people don't realize that the face amount value of their life
insurance is counted as part of their estate for determining if estate taxes are
due. Therefore, if someone died with an estate of $450,000, but had $200,000 worth
of life insurance, there estate would be valued at $650,000 and their heirs would
pay estate tax.
From time to time Congress reacts to the growing size of people's estates and adjusts
the lower limit for paying estate tax. This happened again in 1997 when Congress
changed the law to allow a gradual increase in the lower limit for paying estate
tax. Beginning in 1998 it rose to $650,000 and is scheduled to rise to one million
dollars in ten years time. Of course, that is making the wild assumption that Congress
will not change the law again within those ten years! Many of us in the estate planning
field are not convinced it will happen.
The fact is, there is a great deal of misunderstanding and misinformation about the
federal estate tax. It is not simply a "rich people's tax", nor is it simply
a tax on your estate. In reality, the federal estate tax is a stunning revelation
of what the federal government believes about who actually owns your assets. You
think you own them, but they believe that they do! This becomes crystal clear when
you fully understand the federal estate tax.
Most Americans know absolutely nothing about the estate tax, and most financial planners
and advisors know very little. The common belief is that the federal estate tax is
a tax on the transfer of your assets to your heirs at tax rates of 37% to 55%, depending
on the size of the estate. They also believe that most people don't have to pay any
estate tax because everyone has a "$600,00 exemption" from the estate tax.
Therefore, if someone dies with an estate valued at less than the "exemption
amount" they don't pay any tax.
While these beliefs are not fundamentally wrong, they are very incomplete. The fact
is, there IS NO FEDERAL ESTATE TAX EXEMPTION! Not of $600.000, or $650,000,
or any other amount! The federal estate tax is imposed under Internal Revenue Code
section 2001.
SECTION 2001. IMPOSITION AND RATE OF TAX
(a) IMPOSITION
A tax is hereby imposed on the transfer of the taxable estate of every decedent
who is a citizen or resident of the United States.
There is no section that ever mentions an "exemption" from the tax.
However, section 2010 provides for a tax "credit" of $192,800 against the
amount of tax due.
SECTION 2010. UNIFIED CREDIT AGAINST ESTATE TAX
(a) GENERAL RULE
A credit of $192,800 shall be allowed to the estate of every decedent against the
tax imposed by section 2001.
A tax credit is fundamentally different from a tax exemption. A tax exemption is
deducted from the taxable amount, while a tax credit is deducted from the amount
of the tax itself. It is a credit directly against the amount of tax that you owe.
For instance, if you had $20,000 of income, but you had a $5,000 tax exemption, you
would reduce the taxable income to $15,000, and then you would figure how much tax
you owed on $15,000. However, if you owed $20,000 of actual tax, and you had a $5,000
tax credit, you would only have to pay $15,000 in tax. So a tax credit is very different
than an exemption.
As I said, there is no such thing as a $600,000 "exemption" from the estate
tax, but rather there is a tax credit of $192,800 which is deducted directly against
the tax that is owed. It just so happens that the amount of estate tax due on an
estate of $600,000 is $192,800! Which means that a $600,000 estate would apply the
$192,800 tax credit, and would wind up paying no tax.
That is the reason that many people speak of a "$600,000 exemption". However,
thinking of it that way is exactly what the federal government wants you to do. That
way you will not think about the true nature of the estate tax. Let me explain.
What, exactly, is the estate tax? I know we've already said that it's a tax on the
transfer of your assets when you die, but what "kind" of tax is it? The
courts have defined the federal estate tax for us several times. They have said the
federal estate tax is, "an excise tax on the transfer of assets affected by
death". Knowlton v. Moore, 178 US 41, 20 S Ct 747, 44 L Ed 969 (1900);
YMCA v. Davis, 264 US 47 (1924), 44 S Ct 291, 68 L Ed 558; Edwards v. Slocum,
264 US 61 (1924), 44 S Ct 293, 68 L Ed 564; Goodman v. Granger, 243 F 2d 264
(1957); Babb v. U.S. 349 F Supp 792 (1972).
The estate tax is an "excise tax". An excise tax is also referred to as
a "privilege tax". It is a tax on a privilege granted by the government.
The government is prohibited from taxing anything that is a "right". The
constitution tells us that our "rights" were granted to us by God - not
the government, and the constitution created the government to "secure"
those rights. However, some benefits we enjoy from our government come, not by way
of our rights, but specifically by way of
special "privileges" granted to us by the government. For example, the
ability to operate a business as a corporation does not come to us as a "right",
but as a privilege from the government. Corporations are only created under the authority
of the government, therefore, they are a privilege. Any privilege the government
gives to us they have the right to impose a tax on that privilege and that "privilege
tax" is called an "excise tax".
Now consider again that the estate tax is "an excise tax on the transfer of
assets" at death. This clearly indicates that the federal government believes
that when you die ALL OF YOUR ASSETS BELONG TO THEM! However, they have given
you the "privilege" of leaving the assets to someone besides the government.
But when they give you that "privilege" they also impose a "privilege
tax" against that privilege and it's called the federal estate tax! If you had
the "right" to leave your assets to whomever you wish, they could not impose
an excise tax. So clearly, they do not believe that you have such a right!
This is also the real reason that there is no such thing as an estate tax "exemption".
Remember that I said that an exemption goes against the taxable amount. It says that
a certain amount is "not subject" to tax. But the federal government won't
say that. That would be saying that the first $600,000 of your assets actually belong
to you and therefore, are not subject to tax.
Instead, the federal government gives a tax credit, which says that all the assets
are subject to the tax and the tax is owed, but the tax is relieved by the tax credit.
Don't be fooled by all the misinformation concerning the federal estate tax. When
you understand it, it is a clear indicator of what the federal government really
believes about what belongs to you and what belongs to them!
Heritage America calls for the elimination of the federal estate tax as being
fundamentally unfair to the American people. Until that goal is accomplished, we
devise various strategies to legally lower or eliminate federal estate taxes. It
is possible to accomplish these goals using family limited partnerships and certain
types of business trusts. However, they will have to be discussed in a future article.
WHO IS HERITAGE AMERICA?
Heritage is a private membership organization formed as a not- for-profit Washington,
D.C. Corporation. Our representatives educate people on the benefits of estate planning
through Heritage membership. The clients purchase a membership in Heritage, which
allows our attorneys to prepare an estate plan for them. Heritage has
its own staff lawyers. They work for the Heritage members. Our attorneys can legally
serve any member - in any state. Every member receives a phone call from our attorney
& an office paralegal. We prepare the plan and you assist your client to implement
the plan. We pay a commission to our representatives for recruiting people into membership
of Heritage, NOT for providing "legal services".
Since our beginnings in 1987, we have been a unique association.
We are dedicated to educating the American people regarding the unfair, confiscatory
taxation and expense of their estates, to work politically to change those laws,
and to providing, for the mutual benefit of our members, different forums of assistance
by which they can avoid or mitigate the effects of those oppressive laws. The principles
of professionalism, quality work, good value, and teamwork have made Heritage America
what it is today - a fast growing membership of people who have the common goal of
protecting their estates through mutual assistance of our association, and promoting
the public welfare through education regarding these vital issues.
For further information on becoming a Heritage America Representative or member,
please call 1-800-487-8780 or e-mail Michael Vallone at mvallone@interaccess.com
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