This article originally ran in the Philadelphia Business Journal on September 6, 2017.
Only Morons pay the estate tax. The New York Times reported that Gary Cohn, a senior economic advisor to President Trump, uttered these words as the administration began rolling out its tax reform proposal. To be fair, the Times cited another source that stated that Cohn did not actually use the term “moron” but rather, “rich people with really bad tax planning.”
It’s true that very few Americans ever pay Federal Estate Tax. In 2015, 4,918 households paid the estate tax generating total revenues of approximately $17 billion dollars. The Administration is on record as wanting the Estate Tax repealed as part of its comprehensive tax reform package. Currently, the tax only applies to estates in excess of $5.49 million for individuals and twice that for married couples.
In fact, with proper tax planning, almost everyone, even the wealthiest individuals, can reduce the tax by carefully planning their affairs over a lifetime. With this as context, Gary Cohn’s statement really begs the question “why have the tax if with proper tax planning the rich can legally avoid it entirely?”
Who then are these so-called “morons” still paying the estate tax? The answer is people who die with substantial wealth titled in their name. Estate tax planning for the uber-rich can be summed up as moving enough assets out of your name in a cost-efficient way so that at death, you fall below the $5.49 million threshold (twice that amount for married individuals.) How the wealthy accomplish this while still enjoying the benefits of their accumulated wealth is how estate tax attorneys justify their existence. You could surely argue that the collective brain power of the tax bar could be put to better use; but that treads into the political debate of whether we should have an estate tax at all.
As long as we have an estate tax, and I would argue even if the tax is repealed, wealthy taxpayers must proactively plan to avoid it. For the very wealthy, simply transferring accumulated wealth to family members is not effective as there is a corresponding gift tax which prevents what would otherwise be a simple solution. Instead, it is imperative to anticipate future increases in wealth and divest the affected assets before the appreciation occurs. Charitable planning often is a part of this work, and is encouraged by the estate tax law. Many of the entrepreneurs who end up paying an estate tax fail to do just that. Instead they hold on to the nascent business interests while they appreciate only to then focus on protecting the accumulated wealth from the tax man. Alas, good things do not cometh to those who wait.
Myriad strategies exist to transfer business interests while retaining managerial control – something entrepreneurs demand. SLATs (Spousal Lifetime Access Trusts), GRATs (Grantor Retained Annuity Trusts), Sales to IDGTs (Intentionally Defective Grantor Trusts), recapitalizations, FLPs, (Family Limited Partnerships) and family LLCs are a few of these strategies, and all within the tax lawyer’s milieu. The common thread in all these and many other planning techniques is removing future wealth from a person’s taxable estate while retaining some degree of direction and control and protecting wealth from other risks. Whether we ever see another repeal of the estate tax, it is incumbent on those who counsel wealthy individuals to be proactive in implementing these and other planning techniques.
For those who counsel privately-held businesses, the earlier ownership interests can be removed into the above tax saving vehicles the better. When the sale or merger is announced- it is too late. When the patent is granted, it is too late! When the agreement of sale is executed, you get the idea.
Perhaps Mr. Cohn’s quote should have read, “Only morons fail to hire creative tax counsel.”
Peter Spirgel is an attorney at Flaster Greenberg PC where he serves as Chairman of the Board. He has a business practice with special emphasis on taxation, estate planning and corporate mergers and acquisitions. He also represents privately-held businesses and their owners in capital transactions, transition planning and shareholder disputes. He can be reached at 856.661.2267 or firstname.lastname@example.org.