Exploding Some Estate Tax Myths

If you own property and assets or have loved ones who depend on you to provide income or care, you should have an estate plan. However, some people hesitate to create one, fearing that taxes will eat up the lion's share of their estate. But even though estate taxes are real and rates are high, topping out at 40%, only people with estates worth many millions of dollars are affected by federal estate taxes. The few estates that pay estate tax generally pay less than one-sixth the value of their estate in tax. Further, only the wealthiest 0.2% of Americans owe any estate tax because of the high exemption amount — $13.61 million per person.

In the end, roughly two of every 1,000 estates are subject to the federal estate tax, which means that 99.8% of estates owe no estate tax at all. Additionally, many states don't have estate or inheritance taxes. Those states that do have estate taxes have lower thresholds than the federal rate. 

In other words, it's a myth that the estate tax forces estates to turn over most of their assets to the government. What are some other estate-tax myths?

• That a will alone is sufficient for inheritance tax planning. A well-crafted will is undoubtedly a cornerstone of inheritance planning, but it's not the sole solution. Various other strategies, like trusts and lifetime gifts, can complement a will and enhance overall tax planning. A comprehensive approach that considers all available options is essential for maximizing tax efficiency.
• That the estate tax constitutes double taxation because it applies to assets that already have been taxed as income. This is not true for small estates, because they are generally exempt from estate taxes. Large estates consist to an above-average degree of unrealized capital gains — that is, assets that have never been taxed. The estate tax is the only means of taxing this income.
• That the estate tax unfairly punishes success. The truth is that the estate tax affects only those most able to pay, and the funds the tax raises help support a range of programs that benefit the nation.
• That inheritance taxes can be entirely avoided. Though there are legal ways to minimize the estate tax's impact, large estates will find themselves subject to it.
• That loopholes enable many large estates to avoid taxes. Many wealthy estates do employ lawyers and accountants to develop and exploit ways around estate tax, allowing portions of their assets to be inherited tax free. One such strategy is a grantor retained annuity trust, which allows the grantor to transfer future appreciation on assets to their heirs while bypassing the estate tax. However, GRATs only work well when interest rates are low; in other markets, the full asset value still goes back to the estate.
• That eliminating the estate tax would encourage people to save and thereby make more capital available for investment. This argument doesn't account for government borrowing. If the objective is increased savings, it would probably be more effective to keep the estate tax and use proceeds to reduce the national debt. Further, the added government borrowing would more than outweigh any added private savings, leaving the economy no better and possibly worse off.

​The estate tax is the nation's most effective tax policy tool to mitigate the negative effects of inheritances, which account for about 40% of household wealth and are extremely concentrated in the top income brackets. Because the estate tax affects only those who are most able to pay, it can be looked at as the most progressive component of the tax code that is itself only modestly progressive.
It's essential to focus on lawful strategies to manage, rather than eliminate, tax burdens. Dispelling common myths surrounding the estate tax is one step.

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