Estate tax musing and responses

Rare is the time when my miserable posts inspire contributions from such distinguished brethren. Given that my thoughts on estate taxes resulted in two responses, one would think I had posted my opinion on the merits of 5.56mm bullets over Brother Drummers sainted 7.62/.308/.30-06 family of terrorist exterminators.

I will admit that at bottom my observations and suggestions are based on personal experience. In particular the case regarding my mother who was thrust into the role of executor for her sister’s estate upon my aunt’s untimely passing. And the root of all this is a system so complex, so Byzantine and so costly that 3 years after my aunt’s death my grandmother (the sole beneficiary) has still not received the full assets of the estate.

I don’t want to recount all the pain and frustration my mother endured, not to mention the expenses for legal and accounting services. Suffice it to say that a woman with an estate valued at about $380,000 (primarily consisting of two condominiums, some savings bonds, some CDs and some stocks) has cost over $10,000 in law and accounting fees though the primary mission of the executor has been the liquidation of all assets to provide the cash to the heir. Clearly some expenses are unavoidable, documents need to be prepared for the appropriate courts, taxes figured, real estate agents paid etc. But it is reasonable for the expenses of administration to consume 3-5% of the estate? Though no federal taxes were due, the state of New Jersey raked in a sum of $30,000. The state of Florida requires a closing letter from the IRS (i.e. that no federal taxes are due) despite the federal law that if the value of the estate is less than $600,000 (or whatever the then current exemption was) no return is even necessary. All that (plus expenses of the Florida attorney) for the distribution of a mere $12,000 in escrow (the difference between the sale price and the mortgage of the Florida retirement home).

To put a fine point on it, why should the system be so complex, so convoluted and so costly that the average citizen is forced to employ specialists to navigate it? The obligation of the state is to ensure identification of all assets, identification of legitimate heirs and to validate the legal transfer of those assets. At each step of the way the state (and its vassals) slice off a small but tasty morsel of value. Did you know that in New Jersey the letters testamentary expire in 60 days? Try arranging the transfer of a mutual fund from the estate to the heir and you discover (as I did) that the request has been "in process" so long that the appointment letter has expired.

I realize that I’ve gone on too long, but the purpose of this exposition remains. Regular citizens should be able to manage and dispose of a very simple estate in short time with limited expenditures. That is not the system we live under. And yes I know that eliminating the federal estate tax will not solve even 20% of the problems we’ve encountered.

There is only one economic argument that I can think of regarding estate taxes. And that is one of economic efficiency. There are broadly three categories of estates. The first is those so small that taxes have no impact.

The second are those where the value approaches or marginally exceeds exemptions. The last are estates so large, the Gates or Buffet kind, that a small investment of say $5 million in estate planning and tax avoidance yields outsized benefits for the heirs. Who suffers greatest? One can expect that any money paid by the estate of a Gates or Getty is only that which the accountants and lawyers could not figure out how to shield. While these sums are no doubt large, how do they stack up in relation to the amounts spent in "getting it right" by the estate planners? The stuckees are those in the middle group. I would much rather have Gates invest millions in his business than millions in law firms, accountants and estate planners.

As to Dan’s point. I remember he made this argument a while back. It seems to me that there should be a simple solution. Under current rules assets are re-valued upon transfer, stepping up the basis. Why not retain this feature of the current system? Is this impractical?