Equal under the law is one of the core principles of the American legal system. Its been a revered keystone of our body of laws and taxes for over 200 years. With that in mind, it may surprise you that there are effectively, two sets of federal estate tax laws.
But there is one set for those who are either ignorant of them or who take no action and another for those people who both understand these laws and act to take advantage of the tax-saving opportunities provided by them. Which set of laws a family chooses to use when transferring assets makes a tremendous difference in the size of their estate taxes.
Section 2001 of the United States Tax Code defines how federal estate taxes work. It mandates that estates which have assets in excess of $2,000,000 will pay taxes on that excess at rates which can go as high as 46%. This is the set of laws which impacts those who either dont understand them or do nothing about them.
The alternative set of laws is defined in Section 664. This section provides a variety of opportunities that can protect estates of $1 million, $10 million, $100 million or more from paying any federal estate taxes at all.
How these two sets of laws work - and the very different ways that they can impact wealthy families - is well-illustrated by the stories of Joseph Robbie and Jacqueline Kennedy Onassis.
Fumbling the Ball
Robbies estate was somewhat less than $100 million and almost 50% of it vanished in federal estate taxes. It compelled his family to sell the Dolphins at a fraction of its value. Strife and bitter resentments developed within the family because of the actions they had to take to pay the taxes. The real tragedy is that it all could have been avoided.
"If that $45 million could have been paid with a life insurance check," concluded Financial Planning, "it would have certainly changed the financial complexion of the familys situation."
Smart and Elegant Planning
Fortune magazine reported, "she left behind, to the rest of us, a model of smart estate planning. At a very basic level, the fact that she had a will may be the most important lesson of all. A surprising number of smart people dont make a will and that opens the door for the government to have a potential field day. On a more sophisticated level, the Onassis will makes smart use of estate planning vehicles like trusts to pass money on to heirs and charities while reducing the bite from estate taxes."
Fortune summarized the terms of the Onassis will in a sidebar titled What Jackie did . . . and why it was smart:
Fortune concluded its Onassis estate article, "One nice thing about writing a will and thinking about your estate - it is a chance to leave a final word in black and white. You could see the thought beyond the legal verbiage and thats what a last will and testament should ultimately reflect. Its a rare look at how a good estate plan is done."
The Robbie articles conclude less happily. "Good planning can help contain and eliminate the damage estate taxes cause." notes Financial Planning. "The ways of minimizing the effect of estate taxes range from holding life insurance in an irrevocable trust to gifting out portions of the estate to creating charitable trusts. Clients should realize that the tax collector is waiting to make a big hit on an estate. In the case of the Robbie family, being blindsided by estate taxes meant fumbling away the team."
These stories end so differently for one simple reason: Jackie Onassis decided to use the provisions of Section 664 to reduce her estate taxes to approximately 3%. Joseph Robbie chose to take no action at all. His inaction allowed Section 2001 to tear his estate and his family in two.
Two sets of laws.
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