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Estate Tax Considerations and Maybe a New Idea (12/10/2010)

Posted in Taxes

It seems to me that if estates are to be taxed, there should be some consideration for the number of heirs involved. A parent should be able to leave more, after taxes, to five heirs, for example than to just one. And it should always be possible to leave a family business or farm to one’s heirs without them having to sell it to pay inheritance taxes.

An easy solution to the problem would be to eliminate the estate tax completely but make inheritances taxable as income with the provision that such inheritance income can be spread over the life expectancy of the recipient, much as installment sales of property are spread over several years and as IRA or 401K income can be spread over a life expectancy. The distribution of an estate as taxable income would have to begin immediately as in the case of installment sales but be based on life expectancy as in the case of IRA’s.

A wealthy individual with an estate of $20M and five children, for example, could leave each of them $4M that would go into tax deferred accounts that would have annual required minimum distributions, based on life expectancies of the heirs, to be taxed as ordinary income. If the wealthy individual left all the $20M to only one person, the required minimum distribution and resulting taxes, other things being equal, would be much higher. Of course heirs could always take more than the required minimum distribution, but would incur higher taxes by so doing.

To make some inheritance completely tax free, there could be an exclusion of taxes on the first million dollars of inherited income received by any one person. That would let the wealthy individual mentioned above leave $1M to each of the five children or a total of $5M tax free with $3M going into each child’s tax deferred account.

Of course I would prefer elimination of income and estate taxes completely in favor of a consumption tax but I really don’t think our representatives are going to give up the taxing power they have now. It just seems to me that, given the realities of our situation, the idea above is a more reasonable and fairer alternative than the various estate tax options currently under consideration.

Is this a new idea, or am I just reinventing another wheel?

(Updated 8/6/2016)