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Comment by nickjj

3 years ago

This is a topic I know very little about but doesn't this type of "absolutely insane" thing happen to other small businesses due to estate taxes too?

For example:

    - Your uncle owns a farm for the last 50 years
    - Over the 50 years the farm's land value has risen to $1,000,000
    - The farm itself only generates $20,000 a year in profit which is spent on living expenses
    - Your uncle has no savings
    - Your uncle dies
    - A 40% federal estate tax is applied onto the farm's current value from your uncle's death (state taxes might also be added)
    - Whoever owns the farm is now responsible for coming up with $400,000+ or you're forced to sell the farm to cover the tax bill

I might be butchering this so please correct me if I'm wrong but this feels like a system that helps larger companies because it prevents a smaller business being able to exist multiple generations.

8 comments

nickjj

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dragonwriter  3 years ago

Assuming your uncle was single and not able to leverage the double estate tax exemption for married couples, the $1,000,000 farm value is only $11.92 million short of the threshold at which estate tax would start to apply, and only to the amount above the threshold, at an initial marginal rate of 18%. It only reaches a marginal rate of 40% on the amount more than $1 million over the exemption threshold.

If, instead of being $1 million, the farm (assuming it was the whole of the estate) was worth $13.92 million, the actual estate tax would be $345,800. Assuming the same ratio of annual profit to value in your hypothetical, the annual profit would be $278,400; so if you had no other assets to pay the tax, you’d probably need to borrow against the profits, but that shouldn’t be too hard given their magnitude.

jaggederest  3 years ago

> Federal estate tax is due if an estate's value exceeds the estate tax exemption amount, which is $12.92 million for deaths in 2023

The numbers are much, much larger than a simple $1m family farm.

Also, remember, that cap is a exemption from the value. If you have a farm worth $14m, you will have to pay approximately $400,000 in estate tax (NOT 5.6 million like you would naively calculate). At that point, if the farm doesn't generate (effectively) any revenue, and it's not mortgageable or you can't secure a personal loan, it's probably best for everyone that it be sold. You certainly wouldn't be able to e.g. pay property tax on a property that size.

The estate tax is the most widely misrepresented thing in the tax code. It's designed to prevent multimillionaires and billionaires from passing down their entire fortune to the next generation intact. It almost never affects anyone but the top 0.5% wealthiest people in the country, and only then if they do absolutely no estate planning whatsoever.

williamDafoe  3 years ago

Thomas Jefferson argued strenuously for the estate tax and for inheritances (without a will) to be divided evenly among the children. In Europe the law of primogeniture put inheritances in the hands of the firstborn male which guaranteed that a dynasty could always be preserved! Ick!

  • tomrod  3 years ago

    Fortunately he has passed away and can no longer argue this idea with the hagiographic veil of authority.

anonymouskimmer  3 years ago

> it prevents a smaller business being able to exist multiple generations.

In addition to what everyone else says, if you have a multi-generational business the owner should be bringing their child(ren) in as executives and part owners of the business. The estate tax would only apply to the part of the business the original owner still owned at their death, not the part of the business owned by the child(ren).