Planners say no to increase in estate tax rates

Dec 16, 2012 @ 12:01 am

By Mark Schoeff Jr.

Warren Buffett and some of his rich friends may be OK with a hike in estate taxes, but some investment advisers are not.

“I have zero clients who think the exemption should decrease or the rates should go up,” said Blaine Dunn, owner of Dunn Financial Advisors LLC. He said that parents who work hard and save hard want to pass along as big a chunk of their financial foundation as possible to their families.

“The fruits of that labor should go to our children, not to the government,” Mr. Dunn said.

Last week, United for a Fair Economy, a group intent on raising awareness about the concentration of wealth and power in the U.S., released an open letter signed by Mr. Buffett and 35 other billionaires, millionaires, business leaders and activists calling for a taxation rate of 45% on estates, with a $4 million exemption for couples and a $2 million exemption for individuals.

Under current law, there is a 35% estate tax, with a $10.24 million exemption for a couple and a $5.12 million exemption for an individual. If Congress does not come to an agreement on estate tax policy by Dec. 31, the estate tax will rise to 55% with a $1 million exemption.

STALEMATE

The estate tax has been overshadowed in continuing talks aimed at averting about $600 billion in tax increases and spending cuts that would go into effect Jan. 1. As of late last week, the negotiations seemed to have stalled.

Proponents of raising the estate tax say the wealthy have an obligation to pay more because they have enjoyed the benefits of government spending on education and infrastructure as they built their fortunes.

The lack of an explicit upper limit on the estate tax rate in the plan, however, makes Erin Baehr nervous.

“It just seems that people work their whole lives to accumulate wealth,” said Ms. Baehr, president of Baehr Family Financial LLC. “To tax it at 45% and go up from there is wrong, in my opinion.”

The three dozen people who are backing the plan — Mr. Buffett, chairman and chief executive of Berkshire Hathaway Inc.; John Bogle, founder of The Vanguard Group Inc; and Drummond Pike, a principal at Equilibrium Capital — also make their case in the context of what's fair.

“We believe it is right to have a significant tax increase on large estates when they are passed on to the next generation,” the group said in a statement. “We believe it is right morally and economically, and that an estate tax promotes democracy by slowing the concentration of wealth and power.”

In a conference call with re-porters, Mr. Bogle said, “I'm more than happy to pay our fair share on the wealth that we've been fortunate enough to accumulate over the years.”

The group said that under its plan, the estate tax “will only be paid by the top 1% of estates.”

A United for a Fair Economy official said the argument that the estate tax whacks farms, ranches and small businesses was a “canard” that distorts the debate.

One adviser, however, said that the billionaires' proposal would hit a much broader income group than just those at the top — especially in areas where real estate prices are high.

“Even a $4 million exemption — or $2 million per person — is not much when you factor in the cost of a house and how much people may have in [individual retirement accounts],” said Stephen Craffen, a partner at Stonegate Wealth Management LLC. “It's people of moderate wealth who are more likely to be affected by” the estate tax.

INEVITABLE?

Indeed, the notion that a tax increase for the well-off is inevitable is gaining currency.

“Most of my clients are OK with paying some more tax, as long as it's reasonable,” said Kori Allen, portfolio manager and part owner of Pine Haven Investment Counsel. “And [the billionaires' estate tax plan] numbers seem reasonable. There is a broad understanding that taxes need to go up, but they want the increase to be slight.”

The challenge for the billionaires will be to get the estate tax into the fiscal cliff conversation. It has been largely ignored by the White House, and several Senate Democrats are wary about raising the estate tax.

“They're going to stay at $5 million and 35% because the Demo-crats have split themselves,” said Dean Zerbe, managing director of alliantgroup LP and a former Republican tax counsel to the Senate Finance Committee.

“Republicans are pretty cohesive on it,” he said. “I've not heard the White House say word one about this issue.”

Another Washington-watcher agrees that the estate tax is unlikely to sunset.

“If a deal is reached on taxes generally ... [it's] likely to include an estate tax exemption somewhere between $3.5 million and $5 million, and a 45% rate,” Andrew Friedman, principal at The Washington Update, wrote in a recent newsletter.

mschoeff@investmentnews.com Twitter: @markschoeff

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