Warren Buffett and Bill Gates on the estate tax

Warren Buffett and Bill Gates on the estate tax

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I just came across a interview of Warren Buffett and Bill Gates which I thought was relevant to our earlier discussions of wealth, luck and whether the wealthy should complain less about their share of the tax burden. (I say “discussion” because, yes, I did get some of you to comment. And no, I didn’t pay anyone to comment.)

In the interview with Liz Claman of Fox Business News on May 4, both Buffett and Gates say they are in favor of the estate tax. They make a pragmatic point similar to the one Robert Frank of the Wall Street Journal made in passing – the estate tax raises significant revenue. If we repeal the estate tax, how will we replace the lost revenue?

Buffett also does the following calculation. Approximately 2,450,000 people in America will die in 2009, but only about 12,000 federal estate tax returns will be filed, which means that only 1 in 200 people leaves a taxable estate. If you went to a funeral every month, says Buffett, it could take 17 years to attend the funeral of someone whose estate will be federally taxed. I haven’t checked his numbers, but his point is that if we repeal the tax on 1/200th of the population, we’d have to shift the tax burden downward to everyone else.

Gates then says that people with very rich estates, himself and Buffett included, have benefitted from the rules and stability of this country. If they had to choose where to be born, they would choose the U.S., even if that meant paying the estate tax.

According to a blog post by Edward Zelinsky, a law professor at Cardozo, Warren Buffett has made the same argument in the past:

Among his other observations, Buffett has correctly noted the dangers to a democracy of inherited wealth as well as the moral obligation of those who have done particularly well in American society to give back to that society. As Buffett observed, he would not be Warren Buffett if he had been born in Bangladesh.

These concerns have led Buffett to support retention of the federal estate tax and to express dismay that his federal income tax bracket is lower than his secretary’s.

Which seems very civic minded indeed, except that, as Zelinsky notes, Buffett and Gates appear to have planned their estates around charitable giving to avoid paying federal estate tax.

Zelinsky writes:

Buffett (and Gates) might explain this apparent contradiction by arguing that their charity is an effective substitute for taxation. Thus, the argument would go, when they give $1.00 to the Gates Foundation with no corresponding tax payment, they should nevertheless be treated as if they had paid $1.00 in tax since the contributed $1.00 is devoted to public purposes.***

[But] giving money to the Gates Foundation is not the same as giving money to the federal Treasury. The federal Treasury is controlled by the people of the United States through their elected representatives. The Bill and Melinda Gates Foundation is controlled by Bill and Melinda Gates.

Zelinsky urges Buffett to put “his money where his heart is” and give charity to the Gates Foundation on a taxable basis. The logic escapes me. If Buffett really believes that the best place for his money was the federal government, he should donate it all to the Treasury and encourage Bill Gates to do the same. After all, Buffett’s estimated $37 billion is 2% of the projected $1.84 trillion federal budget deficit for 2009.

It seems to me that Buffett’s actions imply a clear distrust of governmental taxing and spending programs and their ability to improve society in an efficient manner. As we’ve said, the argument that one has a moral obligation to society for the opportunity to acquire wealth does not necessarily lead to an endorsement of government tax and spend policies. Philanthropy has a long history of improving society. Warren Buffett obviously trusts the Gates Foundation more than he trusts the Treasury to use his money wisely for the public good.

On the other hand, perhaps people who have attained a certain level of wealth stop making sense and maybe I should stop trying to figure them out. At the beginning of the clip Warren Buffett says that the income tax charitable deduction is “peanuts” to him, and he isn’t at all effected by the Obama proposal to reduce the deduction. By the end of the clip, he and Bill Gates are talking about the piles of coupons they used at McDonald’s in China. I’m sure they had a blast.

More to read: Six Tips for Selecting the Best Buyer’s Agent (Buyers agency, Queensland)

Estate Planning, Halacha and the Jewish Law of Inheritance

Estate Planning, Halacha and the Jewish Law of Inheritance

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The question of whether wills are recognized by Halacha involves some of the fundamental concepts of Halacha (Jewish law) under a secular legal system. Rabbinic responsa regarding specific conflicts between the Jewish Law of Inheritance and the law of the land date back at least 700 years to a famous responsum by the Rashba (Rabbi Shelomo ben Aderet), and likely much earlier than that. The Halachic discussions continue today. One notable work dealing with the challenges of preparing a modern estate plan which conforms to Halacha is The Jewish Law of Inheritance, the final work by Dayan Dr. Isidor Grunfeld of the London Beth Din (Jewish court).

Here’s a quick overview of the issue:

There are two distinct questions regarding the Halakhic status of wills and trusts. First, are wills and trusts recognized as valid instruments by Jewish law? Second, if they are, or if estate plans can be made to be Halakhically valid, should they be used to leave property to someone other than those entitled to inherit under the Jewish Law of Inheritance?

Many, if not most, leading Halachic authorities throughout history consider a will to be an invalid document where it contradicts the order of succession laid out by the Torah. This is because both the will and the Jewish Law of Inheritance become effective at the same instant — the moment the testator (the person making the will) dies. According to these opinions, the Jewish Law of Inheritance prevails and the will is ignored. In fact, according to many opinions, simply executing a will is prohibited as a diversion of assets from the rightful Halachic heirs (the Talmudic prohibition of ha’avarat nahala) in a manner enforceable in a secular court.

A common solution to the problem is for the testator to separately sign a note of indebtedness to the non-Halachic heirs in an amount in excess of the estate. The note states that the debt is satisfied if the halachic heirs accept the terms of the will, essentially forcing the Halachic heirs to choose between the will and the note, with the will obviously being the better alternative for the Halachic heirs. Halacha allows a debtor to create an enforceable debt without an underlying reason for the debt. The note probably has no validity in a U.S. court.

There are many other related Halakhic issues to deal with. Does dina demalkhuta dina (the law of the land is the law of the Torah), itself a complex question, apply to the Jewish Law of Inheritance? While one can distribute estate assets during life by giving gifts, according to many opinions such distributions may be limited to assets already owned by the person making gifts. Furthermore, regardless of whether the methods are Halachically sanctioned, at what point does providing for non-Halachic heirs rise to the level of diversion of assets?

I’d be happy to discuss this topic further, so long as it is understood that there are divergent opinions at every step of the way, and that one must consult a Halachic expert for a practical application of these laws.

More to read: How to Work with a Buyer’s Agent in Brisbane

Estate Tax: The Baucus Proposal

Estate Tax: The Baucus Proposal

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Senate Finance Committee Chairman Max Baucus (D-Mont.) recently announced proposed legislation that would amend the tax code. Among other provisions, the bill, known as “The Taxpayer Certainty and Relief Act of 2009,” (S. 722) would implement some much-discussed and anticipated changes to the federal gift and estate tax law.

The last major change to the federal gift and estate tax law was the Economic Growth and Tax Relief Reconciliation Act of 2001. A basic summary of the current law and the changes proposed by Senator Baucus, as provided by the AALU, is as follows:

Under current law, U.S. citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation skipping transfer tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a $3.5 million exemption for individuals ($7 million for couples). The gift tax has an exemption of $1 million ($2 million for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of $1 million, a 55% rate, and a 5% surtax on large estates.

The proposal would make permanent the 2009 estate, gift, and generation skipping transfer tax laws going forward and index the exemption amount. The proposal would also reunify the estate and gift taxes. In addition, the proposal would allow portability of exemption for spouses. Finally, the proposal would increase the amount available under the special use valuation revaluation to equal the estate tax exemption. (AALU Washington Report, 3/26/2009)

In other words, as proposed, there would be no estate tax repeal for 2010. Instead, the estate tax exemption would remain at $3.5 million. A maximum tax rate of 45% would also continue into 2010. In addition, beginning in 2011, the exemption would be pegged to inflation. So, for example, a 3% CPI increase in 2010 would result in a $3,610,000 exemption for 2011.

Under current law, the estate tax exemption for 2009 is $3.5 million, but the gift tax exemption is still only $1 million. Gifts that do not qualify for the annual gift tax exclusion use the lifetime gift tax exemption. The proposed legislation would reunify gift and estate tax by increasing the gift tax exemption to the same level as the estate tax.

The proposed portability of exemption for spouses would preserve the exemption of the first spouse to die, even where the exemption amount was left outright to the surviving spouse. Under current law, couples who together have assets over $3.5 million would have to create a trust (such as a credit shelter trust) to preserve the exemption following the first spouse’s death. Under the proposed legislation, however, the estate of the first spouse to die can elect on the estate tax return to preserve any unused portion of the exemption.

A few more points about the portability proposal:

If the proposed bill becomes law, it seems that it would make sense to file a federal estate tax return even for small estates, since by doing so an unused spousal exemption can be preserved.

The proposed bill allows a surviving spouse to use the aggregate unused exemptions of all marriages, but unused exemptions cannot exceed the basic exclusion amount applicable at the time the surviving spouse dies. This prevents the accumulation of unused spousal exemptions from multiple marriages.

As Greg Herman-Giddens of the North Carolina Estate Planning Blog and others have pointed out, the proposal wouldn’t make credit shelter trusts a thing of the past, since a credit shelter trust also protects the growth of the trust assets from being taxed in the survivor’s estate. A credit shelter trust can also be used to protect assets from creditors and future spouses.

Beyond that, the portability proposal raises a whole new set of potential issues, especially with regard to estate planning for a surviving spouse in a second or third marriage whose estate can potentially benefit from the unused exemption of a previous deceased spouse.

The Baucus proposal is currently in the Senate Finance Committee. To become law, it would still have to survive the committee, pass votes in both houses of Congress and be signed by the President.