Federal Estate Research Articles

2006 Federal Tax Update

This update explains several developments in the federal income, estate and gift taxes affecting individual taxpayers and small businesses. It contains summaries of significant cases, rulings, regulations, legislation and other matters from August, 2005, through September, 2006. This update generally does not discuss developments in the areas of qualified plans or the taxation of business entities (except to very limited extents).

2010 Federal Tax Update

This update explains several developments in the substantive federal income, estate and gift tax laws affecting individual taxpayers and small businesses. It contains summaries of significant cases, rulings, regulations, legislation and other matters from August, 2009, through September, 2010. This update generally does not discuss developments in the areas of qualified plans or the taxation of business entities (except to a very limited extent).

2009 Federal Tax Update

This paper examines significant developments in the federal income, gift, and estate taxation of individuals and small businesses from August, 2008, through August, 2009. It covers important cases, rulings, regulations, and legislation during this period. This paper generally does not address developments in the areas of qualified plans or the taxation of C corporations (except to limited extents).

How does the estate tax affect the number of firms?

Purpose– The purpose of this paper is to estimate the effect of the combined (Federal and state) estate, inheritance, and gift (EIG) tax burden per decedent on the number of firms in the USA.Design/methodology/approach– Estimates are based on a longitudinal panel of 50 American states from 1988 to 2006.Findings– The paper finds that the growth in the EIG tax burden per decedent significantly reduces the growth in the number of firms, especially small firms. The higher dissolution rate among small firms can be attributed to the asymmetric liquidity effect, which limits the ability of small business owners to raise the funds needed to pay the estate tax without liquidating their estates.Practical implications– The estimates suggest that the reductions in EIG taxes, brought about by the passage of 2001 EGTRRA, have lead to a higher growth in the number of firms, ceteris paribus.Social implications– As of this writing, the future of the Federal estate tax looks uncertain. Policymakers should note that the estate tax lowers competition and economic growth, which hurts both the poor and the rich.Originality/value– This study is the first to examine the impact of the combined (Federal and state) EIG tax burden on the number of firms using state-level panel data.

Wealth Accumulation in the US: Do Inheritances and Bequests Play a Significant Role?

This paper formulates an overlapping generations model with both life–cycle saving and altruistic bequests. For a given distribution of earning abilities, the model generates a stationary steady–state capital–to–labor ratio for the economy as a whole and a stationary distribution of net worth among households. We calibrate the model, using the 1995 Survey of Consumer Finances to fix the distribution of earning abilities, and using total 1995 U.S. wealth and Federal estate tax revenues to fix other key parameters. The analysis specifies its version of the Federal estate tax in detail, estimating the empirical degree of tax avoidance. Simulations show that the model can reproduce the high degree of wealth concentration evident in U.S. data. Most surprisingly, the analysis also suggests that the U.S. economy’s steady–state capital–to–output ratio will be insensitive to changes in the national debt and social security.

A Recent Decision of the U.S. Supreme Court Holding that the Benefit of the Spousal Deduction for Federal Estate Taxes Should be Given to Same-Sex Marriages

A Recent Decision of the U.S. Supreme Court Holding that the Benefit of the Spousal Deduction for Federal Estate Taxes Should be Given to Same-Sex Marriages

Message to Congress: Halt the Tax Exemption for Perpetual Trusts

The federal estate tax is in abeyance this year. The popular press has picked up on the possibility that the estates of billionaires such as the late George Steinbrenner will escape the tax. The House Ways and Means Committee and the Senate Finance Committee are now considering two questions: what the rate and maximum exemption will be when the estate tax returns and whether the tax will be reinstated for this year. Lurking behind the headlines but equally important is another tax, the federal generation-skipping transfer tax (GST Tax), which is also in abeyance this year. In 1986, the 99 Congress passed the GST Tax. The purpose was to supplement the federal estate and gift taxes. When private wealth shifts from generation to generation or bypasses a generation without incurring federal estate or gift taxes, the GST Tax steps in and fills the void. When the 99th Congress passed the GST Tax, it added a provision known as the GST Exemption. The GST Exemption allows trust settlors to create trusts without incurring GST Tax. The maximum amount originally exempted was $1 million ($2 million for a married couple), but over time, the maximum amount was increased to $3.5 million ($7 million for a married couple). When the 99th Congress fashioned the GST Exemption, the duration of private trusts was controlled by state perpetuity law. State perpetuity law was then undergoing reform in the states, but the reforms retained the basic durational limit that has been part of Anglo-American law for centuries. Presumably relying on the states to honor tradition, the 99th Congress did not impose a federal durational limit on trusts that qualify for the GST Exemption. With federal law out of the way, the only law blocking a tax exemption for perpetual trusts was state perpetuity law, but that obstacle soon crumbled. As a result of interstate competition for trust business, the state-law perpetuity landscape changed dramatically. The absence of a durational limit on the GST Exemption spawned a movement in the states to repeal or modify state perpetuity rules to allow trust settlors to create trusts that can last forever or for several centuries. It is now well documented that the wealthy are creating GST-exempt perpetual or near-perpetual trusts in large numbers in these trust-friendly states. Considerable private wealth is pouring into GST-exempt trusts from out-of-state settlors, thereby escaping federal transfer taxation for centuries and in some cases forever. The loss of tax revenue will become more acute as time passes. The 111th Congress now has a perfect opportunity to close the loophole in the GST Exemption. The 2010 tax bill is still being finalized. Congress should adopt a durational limit that is calibrated to the generations-based policy of the GST Tax. A few years ago, the Staff of the Joint Committee on Taxation wisely proposed a two-generation limit. Under the Staff proposal, a trust would not qualify for the exemption if it can continue beyond the death of the youngest beneficiary who is no more than two generations younger than the trust settlor. A softer approach would be to provide that a trust initially qualifies for the exemption but loses its exemption once the youngest beneficiary who is no more than two generations younger than the trust settlor passes away. Either approach would put a halt to the ill-advised perpetual or near-perpetual trust movement and the unwarranted loss of tax revenue that is now occurring. Unless and until Congress acts to stop them, trust settlors will continue to pour private wealth into GST-exempt perpetual or near-perpetual trusts this year, next year, the year after, and every future year, and more and more states will modify their perpetuity rule to encourage them to do so.

Family forest owners and federal taxes

Focus groups were conducted with family forest owners to investigate the effect of government tax policies on their decisions regarding their land. Two groups each were held in New Hampshire, South Carolina, Alabama, Wisconsin, and Washington, USA, one with owners enrolled in the state preferential property tax program for forested land and one with owners who were not so enrolled. Each focus group consisted of 8–10 owners and lasted approximately 2h. Overall, only two beneficial federal income tax provisions (treatment of timber income as a long-term capital gain and timber depletion deductions) and five federal estate tax provisions (the effective exemption for estates, the annual exclusion for gifts, use of a will, the step-up in basis for inherited assets, and the effective exemption for gifts) were brought up in over half of the groups. Groups composed of tax program enrollees tended to discuss federal income tax provisions more distinct times than those composed of tax program non-enrollees, and tended to be familiar with more federal estate tax provisions; otherwise, there was little difference between them. Misconceptions about tax provisions were common. As well, groups in every region noted the negative effects of tax uncertainty and that not all professionals are knowledgeable about federal taxes as they apply to family forest owners.

Religious Values and Two Same-Sex Marriage Cases Decided by the Supreme Court of the United States

On 26 June 2013, the Supreme Court of the United States rendered judgment in two cases involving same-sex marriage. United States v Windsor, 570 US __, 2013 WL 3196928, No 12-307, invalidated a provision of a federal law, Section 3 of the Defense of Marriage Act (DOMA), which defined marriage as the union of a man and a woman for all purposes in federal law. Hollingsworth v Perry, 570 US __ , 2013 WL 3196927, No 12-144, held that the official sponsors of a California state constitutional amendment [Proposition 8 (Prop 8)], which defined marriage as the union of a man and a woman for purposes of state law, lacked standing to seek judicial review of a federal district court judgment that ruled Prop 8 was unconstitutional. Both cases were decided on 5-4 votes. The Windsor case was filed by Edith Windsor, who had entered into a samesex marriage in Canada that was deemed valid in New York, where she and her partner lived. New York is one of 12 American states which, at the time of the Windsor ruling, had legalized same-sex marriage. Her same-sex spouse died in 2009 leaving Ms Windsor her entire estate. Ms Windsor’s claim for a federal estate tax exemption as the surviving ‘spouse’ was denied under Section 3 of DOMA, adopted by Congress in 1996. Ms Windsor paid the federal estate tax allegedly owing ($363,053) but filed a claim for a refund, which also was denied by the Internal Revenue Service. Ms Windsor then sued in federal court. While her suit was pending, President Obama and his Attorney General took the unusual step of announcing that the administration would no longer defend DOMA. The House of Representatives thereupon voted to allow some of their members, the Bipartisan Legal Advisory Group (BLAG), to intervene

Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death

Debate over the U.S. federal estate tax has intensified recently as a result of the sunset provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and changes in law passed in conjunction with the fiscal cliff at the end of 2012. Despite recent changes in the law, there remains an open debate regarding the extent to which prospective estates comprise assets that have been taxed previously. Using wealth data on U.S. households, we forecast changes in household wealth in the coming decade and calculate the importance of untaxed wealth in bequeathed estates. Connecting further to the debate, we investigate the impact of various policies on U.S. households. In particular, we compare policies in which the entire estate is taxed at death (estate tax) to those in which only the unrealized capital gains portion is subject to tax (capital gains tax). We estimate that the average unrealized capital gains in estates monotonically increases with the size of the estate, ranging from 13% for estates under $2 million to 55% for estates over $100 million. We also find that policies aimed at taxing the entire estate raise more revenue than those aimed at taxing unrealized gains. However, policies that tax only gains concentrate a larger portion of the tax burden on high wealth households.

“I'm Going to Introduce Them Again and Again”

From 1975 to 1981, Congressman Morris K. Udall of Arizona led a legislative fight to save the independent, family-owned newspaper at a time when there was still an opportunity, however small, to confront the industry trend of group ownership. Though initially unsuccessful in his attempts to garner support, Udall finally drew an attentive audience when he focused his efforts on a tax structure that he believed was responsible for an all-too-common scenario: Newspaper groups’ demand for additional properties was driving up the real market value of newspapers, therefore increasing the state and federal estate tax burden for owners wishing to leave their properties to their heirs. This research explores the debate that accompanied the nation's strongest attempt to preserve the independent, family-owned newspaper.

Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death

Debate over the U.S. federal estate tax has intensified recently as a result of the sunset provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and changes in law passed in conjunction with the 'fiscal cliff' at the end of 2012. Despite recent changes in the law, there remains an open debate regarding the extent to which prospective estates comprise assets that have been taxed previously. Using wealth data on U.S. households, we forecast changes in household wealth in the coming decade and calculate the importance of untaxed wealth in bequeathed estates. Connecting further to the debate, we investigate the impact of various policies on U.S. households. In particular, we compare policies in which the entire estate is taxed at death (estate tax) to those in which only the unrealized capital gains portion is subject to tax (capital gains tax). We estimate that the average unrealized capital gains in estates monotonically increases with the size of the estate, ranging from 13% for estates under $2 million to 55% for estates over $100 million. We also find that policies aimed at taxing the entire estate raise more revenue than those aimed at taxing unrealized gains. However, policies that tax only gains concentrate a larger portion of the tax burden on high wealth households.

Innovative Strategy in Shrimp Potiguar: Asymmetries Power Generation and Implications for Policy Innovation

This paper aims to analyze the technological trajectory and the actors – public and private - political behave in the carciniculture network (cultivate of shrimp) in the federal estate of Rio Grande do Norte. The research was based on both embeddedness and cluster policy approach. The case study was based on bibliographic, archives, and empirical data, whose primary data were collected through semi-structured interviews carried on with 10 members of different organizations from carciniculture sector in the period 2009-2010, as well as interviews already conducted in the area since the year 2005. These data were submitted to content analysis with longitudinal and descriptive approach. Along the technological trajectory of the cluster we highlighted opportunities and limits for innovative strategies generated by asymmetries of power and ability to influence actors in the network. We highlight the relationship between 'power network' and 'links established with public actors' as well as the implications for innovation along the trajectory generated by a more or less state interference.

ESTRATÉGIA INOVATIVA NA CARCINICULTURA POTIGUAR: ASSIMETRIAS DE PODER E IMPLICAÇÕES PARA A GERAÇÃO DE POLÍTICAS DE INOVAÇÃO

Este articulo examina la trayectoria tecnologica y el comportamiento de los actores politicos en el camaron privada y publica (cultivo de camaron en cautiverio) en el estado de RN a partir de los planteamientos de integracion social y politica de clusters. El estudio de caso se lleva a cabo a partir de la literatura, el documental y empirica, cuyos datos primarios se obtuvieron a traves de entrevistas semiestructuradas realizadas con 10 temas de investigacion en el periodo 2009-2010, asi como las entrevistas ya realizadas en la zona desde el ano de 2005. Ellos fueron analizados mediante la tecnica de analisis de contenido, siguiendo un enfoque longitudinal y descriptivo. A lo largo de la trayectoria tecnologica de la agrupacion se destacan las oportunidades y limites de las estrategias innovadoras generadas por las asimetrias de y capacidad de influir en los actores de la red. Se destaca la relacion entre el poder de la red y los vinculos establecidos con los actores publicos, asi como las implicaciones para la innovacion a lo largo de la trayectoria generada por una intervencion mas o menos Estado

New Life for the Death Tax

This article examines the ascendancy of wealth redistribution as the policy underpinning the federal estate tax through the lens of sociology and argues that, by attempting to ensure equal access to the American dream by penalizing only those who have fulfilled its promise, the federal estate tax places fundamental American values in irreconcilable conflict. The reason that the current system does not work, I argue, is rooted more in history and sociology than it is in economics. The solution is not necessarily the repeal of the federal estate tax. Nor is the solution replacing the estate tax with an inheritance tax, an accessions tax or taxing inheritances as income, as proposed by other commentators. The estate tax plays — or should play — an important role in ensuring vertical and horizontal equity in our federal tax system. Perhaps more importantly, it also has the potential to provide a safety net of revenue during times of exigency — such as that currently faced by our nation. In order to achieve these goals, however, we must first correctly recognize the fundamental problem with the current system. When the history of the tax is examined from a sociological and historical vantage point, the real problem is clear.

A two-state analysis of estate taxes and charitable bequests from the most generous decedents

This study uses Censored Quantile Regression (CQR) and probate records for the years 2000–2005 to analyze charitable bequests of the most generous decedents from two states, Virginia and Louisiana. We focus on the most generous decedents because they account for a large portion of total charitable bequests. The most generous decedents' charitable bequest tax price (i.e., one minus the marginal tax rate) elasticity is not significantly greater than one in both our full sample and the subsample of the decedents filing federal estate tax returns. Our finding suggests that allowing charitable bequests to be deductible is not a treasury efficient policy for the most generous decedents. We also find that the tax price and wealth effects for the most generous decedents are overestimated by the Tobit model that has been traditionally utilized by prior studies. Furthermore, filers' charitable bequests are predicted to decrease if the estate tax is repealed.

THE FEDERAL ESTATE AND GIFT TAX: A CASE STUDY IN UNCERTAINTY

This paper uses the Federal estate and gift tax to illustrate the existence of uncertainty in the tax law. After a brief description of the historical circumstances of these taxes and recent legislation, two examples of the effects of uncertainty are discussed. Finally, the negative consequences of uncertainty in the tax law are explored.

Endorsements, Advertisements and Grave Robbers: Why States Must (Further) Extend the Right of Publicity beyond Death

The right of publicity is very valuable, and our States must afford this right the protection it deserves whether or not its owner is alive; the right must survive the death of its original owner. This paper outlines the history of the right and its current legal treatment in California, New York, Georgia, and Florida. Additionally, the paper analyzes economic and policy justifications for extending the right and considers a potential model statute. Finally, the paper addresses federal estate taxation treatment for this property right.

Overview of Statutory Framework Federal Estate Taxation of Nonresidents Not Citizens

This chart provides a visual overview of the statutory framework for the United States federal estate taxation of nonresidents not citizens (Chapter 11, Subchapter B, sections 2101-2108). This chart is designed for students, professionals and experienced scholars alike – anyone who needs a quick reference sheet will find it helpful. This visual representation of the statutory structure allows someone with no background in these specific Code sections to understand quickly the main rules, exceptions, definitions, and cross-references. Instructors and others are welcome to photocopy or otherwise make these pages available for educational purposes.

Federal Estate and Gift Taxation

Federal Estate and Gift Taxation