Friday, September 19, 2008
Estate Tax fallout
One bit of fallout from the recent rash of federal outlays: I think we can kiss goodbye any hopes that the estate tax exemption is going to remain at $2 million. That sucker is back down to $500,000 if Obama wins, before you can say "Patriotic."
And if McCain wins, that's going to be the first bone he throws to a likely Dem congress in order to get even a smidgeon of his agenda passed. Either way, I think it's very unlikely you can bank on a continued $2 million estate tax exemption.
So what does this mean?
Well, like the AMT, it's going to have a disproportionate effect on the blue states...property values in red states (Florida and Arizona excepted) did not inflate as much as properties along the coasts. So to an extent, it's a poison pill for the Dems. But a lot more people are going to need to look long and hard at how their assets are going to be passed on to the next generation.
Incidentally, the increased estate tax burden is going to fall disproportionately on another Democrat constituency: same-sex couples. Why? Because married couples enjoy an unlimited estate tax exemption to the surving spouse. Unless a same-sex couple is legally married, though, even a will is not going to help. Andy Sullivan's long-time companion can pass away (BECAUSE HE WANTS TO!!!!) and even if they own a house jointly that puts them over the 500k exemption, Sully's going to have to find some way to raise enough cash to cover an amount equal to up to 47% of the estate's value over and above the $500k exemption.
It's going to be great for insurance salespeople, of course, since the time-honored way to pay for the estate tax without having to liquidate assets (like a home) is to take out a life insurance policy sufficient to cover the estate tax. The number of people with a new life insurance need is far, FAR higher with an estate tax exemption of $500,000 than it is with an exemption of $2,000,000. Further, I would posit that at the lower exemption amount, the chief asset that will need to be sold to make the exemption is going to be the family home. This is a much bigger deal at a 500k exemption than at the 2 million level, because in many cases, a much larger chunk of the exemption is likely to be the one asset that is most difficult and painful to liquidate in time to pay the estate tax: the home.
Look for a jump in life insurance sales (to cover the increased estate tax liability), annuities (to get money OUT of the estate and convert it to income), and reverse mortgages (to get the house out of the estate).
Now, this is going to be a painful effect for the upper middle class, because they will be forced to weigh the desire to keep a home in the family against the need for retirement income - and they've undersaved to begin with.
I wouldn't rely on pensions for a lot of them. And, quite frankly, unless they've done a terrific job planning ahead, the life insurance premiums it is going to take to cover, say, $300,000 to $1.5 million in increased estate tax liability is not going to be affordable for people in their 50s and 60s, let's say, whose chief asset is in their home, which is not readily convertible to cash to pay a premium.
And this is not even including the cost of providing for their own long-term or nursing home care.
The libtards think they can "soak the rich" by lowering that estate tax exemption back down to $500,000 from $2 million.
I'm here to tell you... they have a funny idea of what "rich" means. The more I learn about family finances, the more I see that this is a pretty ugly development for an awful lot of families.
Splash, out
Jason
And if McCain wins, that's going to be the first bone he throws to a likely Dem congress in order to get even a smidgeon of his agenda passed. Either way, I think it's very unlikely you can bank on a continued $2 million estate tax exemption.
So what does this mean?
Well, like the AMT, it's going to have a disproportionate effect on the blue states...property values in red states (Florida and Arizona excepted) did not inflate as much as properties along the coasts. So to an extent, it's a poison pill for the Dems. But a lot more people are going to need to look long and hard at how their assets are going to be passed on to the next generation.
Incidentally, the increased estate tax burden is going to fall disproportionately on another Democrat constituency: same-sex couples. Why? Because married couples enjoy an unlimited estate tax exemption to the surving spouse. Unless a same-sex couple is legally married, though, even a will is not going to help. Andy Sullivan's long-time companion can pass away (BECAUSE HE WANTS TO!!!!) and even if they own a house jointly that puts them over the 500k exemption, Sully's going to have to find some way to raise enough cash to cover an amount equal to up to 47% of the estate's value over and above the $500k exemption.
It's going to be great for insurance salespeople, of course, since the time-honored way to pay for the estate tax without having to liquidate assets (like a home) is to take out a life insurance policy sufficient to cover the estate tax. The number of people with a new life insurance need is far, FAR higher with an estate tax exemption of $500,000 than it is with an exemption of $2,000,000. Further, I would posit that at the lower exemption amount, the chief asset that will need to be sold to make the exemption is going to be the family home. This is a much bigger deal at a 500k exemption than at the 2 million level, because in many cases, a much larger chunk of the exemption is likely to be the one asset that is most difficult and painful to liquidate in time to pay the estate tax: the home.
Look for a jump in life insurance sales (to cover the increased estate tax liability), annuities (to get money OUT of the estate and convert it to income), and reverse mortgages (to get the house out of the estate).
Now, this is going to be a painful effect for the upper middle class, because they will be forced to weigh the desire to keep a home in the family against the need for retirement income - and they've undersaved to begin with.
I wouldn't rely on pensions for a lot of them. And, quite frankly, unless they've done a terrific job planning ahead, the life insurance premiums it is going to take to cover, say, $300,000 to $1.5 million in increased estate tax liability is not going to be affordable for people in their 50s and 60s, let's say, whose chief asset is in their home, which is not readily convertible to cash to pay a premium.
And this is not even including the cost of providing for their own long-term or nursing home care.
The libtards think they can "soak the rich" by lowering that estate tax exemption back down to $500,000 from $2 million.
I'm here to tell you... they have a funny idea of what "rich" means. The more I learn about family finances, the more I see that this is a pretty ugly development for an awful lot of families.
Splash, out
Jason
Labels: finance, insurance, investing, Real Estate, taxes, The Left
Comments:
I was going to threaten to write my kids out of my will if they don't vote Republican. Then I realised that if they vote Democrat then they will decide with their votes to bring back the "death tax". Now I just tell them that they are the masters of their fate(s).
# posted by 
: 10:39 AM
: 10:39 AM
Thanks for all of your insight into financial matters. It's so hard to find AND UNDERSTAND solid financial information. That's probably why so many Americans don't bother with it and want the government to take care of their retirement for them.
The estate tax isn't going to be a big political deal since most people don't understand it anyway. The Dems will just pass it off as another "penalize the rich" deal. People won't realize how much it hurts until after the FOR SALE sign goes up on the family home.
The estate tax isn't going to be a big political deal since most people don't understand it anyway. The Dems will just pass it off as another "penalize the rich" deal. People won't realize how much it hurts until after the FOR SALE sign goes up on the family home.
# posted by : 10:45 AM
: 10:45 AM
How do the ultra-rich pass their cash to their children? We've had the death tax for decades, maybe even a century (I have no idea really), and yet ridiculously wealthy families like the Kennedys or the Waltons don't seem to have a monetary bloodletting when someone in their family dies.
Am I just jealous and imagining this, or are they somehow sidestepping giving 50% of their net worth to the gov't when they die?
For the record, I AM kind of jealous... :)
Am I just jealous and imagining this, or are they somehow sidestepping giving 50% of their net worth to the gov't when they die?
For the record, I AM kind of jealous... :)
How do the ultra-rich pass money on? Same way the merely affluent do. They do their best to move money OUT of their estate during their lifetimes, through gifting, and by establishing trusts.
For money they don't move out of the estate, they take out life insurance policies sufficient to pay the expected estate tax, and they do it relatively early in their lives, so premiums are relatively low.
In some cases, particularly when they become wealthy (or wealthier) later in their lives, and when they are asset rich but cash poor, they will borrow enough money to pay the premiums on a life insurance policy.
The goal is to have enough life insurance to double the size of the estate at death. Then when they pass on, they pay the life insurance benefit to the government (at the last minute, so they collect interest on the money).
They will frequently use a permanent insurance policy - such as whole life - rather than a term insurance policy for this purpose. This is something that the financial media doesn't get! But from an asset protection point of view, the best kind of policy is the one that's in place when the insured dies. Only a small percentage of term policies ever pay a death benefit, because at older ages the premiums become unaffordable. Even if you're very wealthy, it's very possible, if you live long enough, to pay more in premiums than you ever collect in death benefit. Whole life, purchased while young, doesn't have this problem.
For money they don't move out of the estate, they take out life insurance policies sufficient to pay the expected estate tax, and they do it relatively early in their lives, so premiums are relatively low.
In some cases, particularly when they become wealthy (or wealthier) later in their lives, and when they are asset rich but cash poor, they will borrow enough money to pay the premiums on a life insurance policy.
The goal is to have enough life insurance to double the size of the estate at death. Then when they pass on, they pay the life insurance benefit to the government (at the last minute, so they collect interest on the money).
They will frequently use a permanent insurance policy - such as whole life - rather than a term insurance policy for this purpose. This is something that the financial media doesn't get! But from an asset protection point of view, the best kind of policy is the one that's in place when the insured dies. Only a small percentage of term policies ever pay a death benefit, because at older ages the premiums become unaffordable. Even if you're very wealthy, it's very possible, if you live long enough, to pay more in premiums than you ever collect in death benefit. Whole life, purchased while young, doesn't have this problem.
Thanks. That's been bugging me for quite a while. Never considered using life insurance in that way.
Here's my thinking on the estate tax: People with estates north of $2 million can probably afford to get some advice about how to deal with it, and they are probably sophisticated enough to know they can get some advice. It makes sense for the government to raise revenue from this group, in my view. The alternative, of course, is to raise income taxes. Personally, I'd rather raise more revenue from an estate tax rather than an increased income tax, because that way you're taxing people who didn't earn the money rather than people who earned it.
However, there is a huge difference between an estate of 500,000 and an estate of 2 million. Even unsophisticated middle classers who worked hard and made sound decisions all their lives can easily amass an estate of 500,000, largely from the appreciation of a home.
These people don't consider themselves wealthy, and they're NOT wealthy, in many cases. This crowd, say in the 600,000 to 1,000,000 range, is going to get blindsided.
Married couples can put it off for a while, because of the unlimited spousal exemption. But survivors in same-sex households, surviving siblings sharing a home, and unmarried couples are going to get ripped to shreds.
However, there is a huge difference between an estate of 500,000 and an estate of 2 million. Even unsophisticated middle classers who worked hard and made sound decisions all their lives can easily amass an estate of 500,000, largely from the appreciation of a home.
These people don't consider themselves wealthy, and they're NOT wealthy, in many cases. This crowd, say in the 600,000 to 1,000,000 range, is going to get blindsided.
Married couples can put it off for a while, because of the unlimited spousal exemption. But survivors in same-sex households, surviving siblings sharing a home, and unmarried couples are going to get ripped to shreds.
However, there is a huge difference between an estate of 500,000 and an estate of 2 million. Even unsophisticated middle classers who worked hard and made sound decisions all their lives can easily amass an estate of 500,000, largely from the appreciation of a home.
These people don't consider themselves wealthy, and they're NOT wealthy, in many cases. This crowd, say in the 600,000 to 1,000,000 range, is going to get blindsided.
I can tell you that's definitely the case here in Northern Virginia, where despite the bursting of the housing bubble a decent single-family house still runs around $600K.
Sadly, too many people won't see it coming and their children are gonna get screwed.
These people don't consider themselves wealthy, and they're NOT wealthy, in many cases. This crowd, say in the 600,000 to 1,000,000 range, is going to get blindsided.
I can tell you that's definitely the case here in Northern Virginia, where despite the bursting of the housing bubble a decent single-family house still runs around $600K.
Sadly, too many people won't see it coming and their children are gonna get screwed.
# posted by : 4:24 PM
: 4:24 PM
With a 600,000 house, and ABSOLUTELY NO OTHER ASSETS, a widow or widower, or unmarried individual's heirs will have to find 47,000 CASH to pay the estate tax, if the estate tax exemption reverts to its previous level of 500,000 from 2 million.
How can they raise it? 1.) Life insurance, 2.) Take out a loan against the house, or 3.) your heirs can pay it out of their own money. But that's a big chunk of a college fund or retirement fund right there.
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How can they raise it? 1.) Life insurance, 2.) Take out a loan against the house, or 3.) your heirs can pay it out of their own money. But that's a big chunk of a college fund or retirement fund right there.
