The prepaid estate tax proposal: Is it something like ketchup?

The prepaid estate tax proposal: Is it something like ketchup?

In Malcolm Gladwell's book, What the Dog Saw, Gladwell discusses mustard versus ketchup, the first coming in a dozen varieties and the latter, basically, a single variety; there is Heinz, and pretty much only Heinz, with little competition from Hunt's, Del Monte, and smaller brands, like World's Best Ketchup. It might be laughable, but it's not a reach to think of the estate tax as ketchup; our one and only brand without serious competition (that was, of course, before it was pulled from the shelves). But finally, we might have our mustard. Recently, Janet Novack, in Forbe's Taxing Matters blog, discussed the possibility of what's been in discussion for awhile ... the prepaid estate tax. As proposed by Sen. Maria Cantwell (D-WA), estate taxes would be prepaid at a discount on assets in an estate tax prepayment trust, with taxes based on the assets' market value when placed in the trust. This would basically freeze estates for federal estate tax purposes.

Is the prepaid estate tax a real possibility, or is the estate tax like ketchup; resistant to change?

Democrats and special interests might not be on board: As Novack points out, the possibility of "baby billionaires avoiding estate tax could make this a tough sell to Democrats. In addition, the life insurance industry is sure to fight the pre-payment idea."

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Will the taxpayers bite: "While the math for this approach makes sense," says Derek W. Jensen in Derek's Tax Blog, "it faces one near insurmountable: clients hate the pre-pay tax strategy. Of all of my estate tax strategies this one is the least likely to be used."

Pre-Pay Estate Tax

Likewise, Joe Kristan, writing in the Tax Update Blog, says that the gift tax "pretty much does" the same thing as the prepaid estate tax. However, "relatively few people make taxable gifts, even when it means estate tax savings. It's unlikely that Senator Cantwell's deemed death provision would be much more popular."

Die early and save!

But prepaying could mean greater revenue now and, just as important, a tax rate compromise: Prepaying estate taxes could result in a net positive effect on revenue over the next 10 years, observes Martin Vaughan, of Dow Jones Newswires. Moreover, in satisfying senators who want a 35% estate tax rate and President Barack Obama who supports a 45% rate on inherited wealth, the prepaid estate tax "could deliver the 35% rate, without adding to the federal deficit in the short term."

Estate Tax Prepayment Option Eyed To Break Logjam In Senate

All said, the prepaid estate tax might not work for everyone: Altman and Associates' blog, Altman Speaks, notes that prepaying estate taxes would be beneficial to people with liquid assets at the ready, but "for the average small-business owner with little to no liquid assets, it would obviously be more difficult."

"Pay Now, Die Later" - Congress Contemplates a Prepaid Estate Tax

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