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Proposed Changes to the Estate Tax Laws


Hillary Clinton and Donald Trump both want to change the estate tax law.  They disagree greatly about how to change it. 

The current estate tax law is that every person gets a $5.45 million exclusion that includes gifting and/or estate taxes, and that is portable between spouses. So essentially, every married couple can pass up to $10.9 million to their heirs without paying any estate tax, and that is without any advanced financial planning techniques. This number is also indexed to inflation, so it increases almost every year. There are ways to exclude additional money from your estate, but that is a topic for another day. After the initial $5.45 or $10.9 million, the estate is taxed at 40%. It doesn’t matter that if this was income that you already paid taxes on when you earned it or it was capital gains income from an investment. It doesn’t matter if you paid 15% in taxes on it or 39.6%, you now owe another 40% because you died. 

Under Trump's plan, the estate and gift taxes would be eliminated.  This is pretty simple, and the worst part about it would be that financial planners, estate attorneys, and CPA’s would have to unwind all the estate planning work they had previously done for clients to adjust to this new system. Of course, Trump would have to pass this plan, which could prove difficult. 

Under Hillary’s plan, the gift tax exemption would be lowered to $1 million, and the estate tax exemption would be lowered to $3.5 million. The worst part about it would be that the inflation index would be removed, so every year, the exemption would get “smaller” due to inflation. The second worst part is that the tax rate would increase to 45% from 40%. 

Hillary Clinton’s argument for estate taxes is that she doesn’t want the country to become “dominated by inherited wealth.”  How valid is this concern?  Well, I did some research, and the answer is “not very”. A study by UBS-PWC found that more than 1,000 people became billionaires over the last 20 years, but fewer than half of all billionaires in 1995 were still billionaires by 2014. 

I also looked at the Forbes list of the 500 richest people in the world in 2015 to see if all of them had inherited their wealth.  What I found was that of the top 25, only 11 of them inherited their wealth.  In fact, most of them came from extremely humble beginnings, including the two who throw the most support behind Hillary Clinton (Bill Gates and Warren Buffett)! Number 2 on the list, Carlos Slim, was the son of Lebanese immigrants. Amancio Ortego, who has a fashion company, came in at number 4 on the list, and he was the son of a railway worker. Larry Ellison, at #5, was the son of an unwed Jewish mother who gave him up to adoption to her aunt and uncle. Then you have the Koch brothers and the Waltons, who clearly inherited their wealth.  The next ones are also interesting. Michael Bloombergs father was a bookkeeper for a dairy company. Mark Zuckerberg is the son of a dentist. My favorite, Li Ka-shing from China, had a father who died at when he was just 15, and he worked 16 hour days at a plastics trading company before making his fortune. Sergey Brin, from Google, emigrated from Russia to the US in 1979.  My point is that how can the world be “dominated by inherited wealth” when over half of this list is new wealth? Many of the people on the list are only one generation removed from the creator of the wealth. Notice who you don’t see on this list, the Vanderbilts, the Carnegies, or any of the other wealthy families from 3 or more generations ago.

So why is it that Democrats are always trying to increase the estate tax? Is it because they are really concerned about these wealthy families taking over the country? Of course not. They just see it as a huge opportunity for more wealth transfer. Never mind that is at best double taxation, and at worst stealing from hard working Americans.