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Sunday, November 27, 2005

On the inheritance tax

My own feeling is that the inheritance tax is a bad thing, but completely abolishing it is also a bad thing. My "plan" would be to simply declare that death is not a taxable event, but that all existing tax obligations pass through to the heirs of the estate along with the property they inherit. This would eliminate the need to liquidate property to pay taxes, and inherited property would be managed like any property, to be sold - or not - as desired by property owners.

An example of an existing tax obligation is a house. Let's say the now deceased owner payed $10K for a house, and it's now worth $100K. The person inheriting the house should inherit the capital gains tax due on $90K, instead of having the "capital gains clock" reset "for free" to $100K. If the person chooses to keep the house, they don't pay anything. When he decides to sell, his "tax basis" should be $10K. This rule would be similar for stock, interest in a business, etc.

On the other hand, if the guy inherits a bank account with $50K in it, he shouldn't need to pay any taxes, other than any that happen to be otherwise due on the money.

I believe that the estate tax is the most unfair of them all. Why should the IRS get 50% of my net worth just because I die?

That said, as a financial planner, as long as the laws stay complicated, it's job security for me!
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