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The “Paris Hilton” Tax

Question:

What is one of the reasons that the government created an Estate and Inheritance Tax?

Choose one:
  1. Robin Hood (or the Democrats!) pushed it through.
  2. Because the only things certain in life are death and taxes, especially taxes upon death.
  3. To avoid having a plethora of Paris Hiltons running around.
Answer: C

Although there were many reasons that the Estate Tax was created, one of them was to avoid having too many “Paris Hiltons” in our society. In the old days (many eons ago), there wasn’t a lot of social class mobility. Rich people were born into “old money” and the divide between rich and poor wasn’t very easy to cross.

Nowadays, the federal Estate Tax takes a nice bite out of any individual estate with over $5.25 million ($10.5 million if you are married). The $5.25 million number includes the value of your home or business, so it’s not very hard to reach that threshold. The Estate Tax can run upwards of a high of 40%.

Even if the $5.25 million does not seem to be a scary threshold that will be crossed, keep in mind that the STATE levels for Estate Tax can be much lower. For example, New Jersey’s threshold is only $675k. So if your net worth is higher than $675k when you pass away, the state will tax anywhere from 4–16% of your additional assets before they can be passed on to beneficiaries. Not all states have an Estate Tax, but many do, so unless you’re sure you’ll be living in the same state forever — AND you’re sure that your state’s laws will never change — you might want to plan for the worst and protect your assets from Uncle Sam and his state cronies as much as possible.

It seems unfair to have an Estate Tax when we pass away, because most of us are already taxed to death (no pun intended!) through income taxes, sales taxes, property taxes, sneezing taxes, taxes for just-being-alive, and more. We pay all these taxes our entire lives, and then when we’re gone, the IRS still won’t leave us alone!

But at the same time, it’s beneficial to live in a society where people are encouraged to contribute to our GDP and society, instead of living off large sums of inherited money. Even if someone like Bill Gates passes on billions of dollars to his heirs, a few generations might be on Easy Street, but eventually, his legacy will be taxed away and his descendants will have to work for a living — just like the rest of us.

So while it can seem unfair at times, the Estate Tax can serve a valid purpose. However, there is no point in paying more than your fair share if smart planning can help you minimize it — now that you’ve been warned, make sure your Estate Plan is in place!

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