Death tax Horror stories: Death by Taxation
DEATH TAX DEVASTATION:
HORROR STORIES FROM MIDDLE-CLASS AMERICA
deathtax.com
William W. Beach
Director, Center for Data Analysis
The Heritage Foundation
The death tax is the nightmare of the American dream, as these real-life
experiences from middle-class America will show.
Millions of Americans spend their adult lives working hard, sacrificing and
saving, obeying the law, and doing the countless other things that official
Washington has told them are the ingredients of a successful life. They are
encouraged as federal laws are passed that should expand economic
opportunity and guarantee that civil rights will be as much as part of the
marketplace as they are a part of community life and education. Thousands of
political speeches reinforce the impression they have that Washington
believes the United States really is a land of opportunity and a place where
the financial fruits of hard work can be used to endow the next generation's
economic struggle with greater potential.
However, for those whose economic success also resulted in significant
assets (like a farm, a small business, a factory, or a trucking fleet), what
official Washington says is nothing less than a lie. At the end of life, the
federal death tax will sweep across the profits of family-owned businesses
and estates and leave in its wake millions of devastated survivors,
employees, and communities. Many people whose assets will be depleted to
pay the death tax unfortunately learn about estate and gift taxes so late in life
that they spend their last days as frequently in the company of their tax
lawyers and accountants as they do with their families.
The federal government taxes the transfer of wealth between generations at
rates as high as 55 percent. At $30 billion dollars, the death tax burden in the
United States is the greatest in the world. Indeed, this country owns the
dubious distinction of holding the fruits of economic success in lower regard
than many of its ideological and economic adversaries.
The full case for repealing federal death taxes will involve more than
testimony from its victims. However, evidence of harm to the U.S. economy
and public finances pales in comparison to the stories of the men and women
whose economic virtues regrettably laid the basis for their own and their
offspring's financial devastation. The following sampling of evidence from
that anecdotal record has been compiled from testimony before Congress,
newspaper articles, and statements of family members whose lives were
changed by federal death taxes.
THE DEATH TAX HURTS FAMILY FARMS AND RANCHES
The death tax destroys family businesses and farms, and forces families to
spend their hard-earned money on lawyers, accountants, and life insurance
policies to deal with it. The Public Policy Institute of New York found a
negative relationship between anticipated death tax liability and growth in
employment, particularly for growing firms. Business owners are afraid to
hire new people and expand their businesses when they face the death tax.
The reason is simple: Hiring new people is optional; paying taxes on the
family estate is not.
Family Farm Horror Story #1
Tim Koopman's family has owned ranch property in California for most of
this century. His children would like to continue to run the ranch, but the death
tax may prevent this.
Since Tim's mother died four years ago, the Koopman's have paid about
$400,000 in death taxes. For three of those years, however, Tim has been
able only to pay the interest on the death tax bill, and soon he will not be able
to pay that without selling some or all of his land. This is a decision that he
does not want to face. This land is an important part of his life.
The Koopman's faced the death tax once before. In 1973, Tim was forced to
sell one of the family's ranches to pay the $125,000 death tax bill that he
owed when his father died. Now the family faces the death tax again. Tim
wants to pass the ranch on to his children, but the hefty death tax may leave
little ranch for him to do so.
Family Farm Horror Story #2
Lee Ann's family owns a ranch in Idaho. They have lived there for three
generations, providing jobs for the local economy and helping to create a
strong community. The family did not acquire a lot of material wealth, so it
came as a great shock when the government hit them with a $3.3 million death
tax bill after their father's death.
Although the death of Lee Ann's father was devastating, the death tax bill
made it worse. The family had no debts and owned their land outright; they
thought they had nothing to tax. However, their land had increased in value
enough to trigger the death tax. Lee Ann's mother, who has been under
tremendous strain since her husband's death, is haunted by the realization that
after she dies, her family may lose the ranch because of this tax.
Another concern is who will buy the ranch if they are forced to sell. Lee Ann
worries that, as is the case with so many other properties, the purchaser will
not be another family rancher, but rather a wealthy absentee owner who flies
in once or twice a year for a vacation. This has been happening more
frequently in Idaho, and the sense of community that Lee Ann enjoyed for most
of her life is quickly being lost.
Family Farm Horror Story #3
Robert Sakata is a 42-year-old vegetable farmer from Brighton, Colorado.
Back in 1944, his father paid $6,000 for 40 acres of land to begin a family
farm. Six years later, he purchased additional land for $700 an acre. Today,
the elder Sakata is 73 and owns 2,000 acres of farmland near the Denver
International AirportÑa piece of land worth nearly $380 million.
This might seem like a wonderful situation for the Sakata family, yet the
family owns no other investments; after the elder Sakata and his wife pass
away, Robert will face a tax bill of over $200 million. Robert has admitted
that he would have to sell off half the farm and lay off many of his 350
workers "who are like family." "We don't live like millionaires," Robert has
stated. "We're just trying to sustain a family business."
They will have a difficult time. The death tax will force them to lay off
workers and sell land that has been part of the family for more than five
decades. This treatment of hardworking successful citizens is hardly the story
line for an American dream.
THE DEATH TAX THREAT TO FAMILY BUSINESSES
The Center for the Study of Taxation found that three out of four families
faced with liquidating all or part of their business to pay the death tax would
have to cut their payroll in the process. Moreover, studies by the Institute for
Policy Innovation (IPI) and Congress's own Joint Economic Committee have
found that the death tax costs communities more in lost jobs and lower
economic growth than it raises for the U.S. Treasury.
Family Business Horror Story #1
After her father's death from cancer, Terry Deeny, like many Americans,
could not reflect on her personal loss, spend time with her family, and build
family cohesion. Instead, death taxes forced Terry to concern herself with her
family's survival. As Chairman and CEO of Deeny Construction Co., Terry
watched as payment of the death taxes drove her company deeply into debt.
She had no choice but to lay workers off, sell much of the company
machinery, and stop many business transactions that had kept the business
alive. "We barely survived. It was not an American dream; it was an
American nightmare."
It is hard for people like Terry to find justification for the federal government
to force Americans to scrounge for money in order to pay a tax that puts many
into debt, especially when the money otherwise could be used to help create
jobs and enable even more citizens to achieve the American dream. Family
Business Horror Story #2
Barry, an entrepreneur in Kentucky, likens the death tax to the old saying
about sheep: Slaughter your sheep and you will get dinner for a night. Shear it
and you will get a lifetime of wool. By endangering the future of his family's
business, the death tax is threatening his employees' livelihoods as well as
costing the government future revenue.
For three generations, Barry's family ran their own businesses in Kentucky.
Today, they own 20 gas stations and convenience stores and employ about
100 people. However, Barry's father is growing older and would like to pass
on the business.
According to Barry, the family has spent a significant amount of money on
accountants and attorneys in preparation for shifting ownership of the
businesses from his father to Barry's generation and the grandchildren. Family
members have purchased insurance and have gone through rewriting several
wills and trusts. "It's something you continually update," Barry says; "every
time a new grandchild is born, we have to revise the will and trusts."
The death tax also affects the ability of Barry's businesses to grow. New
opportunities take time to develop, but between worrying about how to pay
the death tax and meet other federal regulations, Barry finds it is harder to
pursue new opportunities. In the end, the businesses and their communities
suffer.
Family Business Horror Story #3
Clarence owns a farming and lumber business in North Carolina. He provides
jobs to 70 people in the community who work on his three small farms, in his
fertilizer and tobacco warehouse, and at a small lumber mill. His family has
worked hard for four generations to build the business. However, all this may
be lost when Clarence dies and his family is faced with the enormous death
tax bill.
Clarence has tried to reduce the burden of the death tax. He has intentionally
slowed the growth of his business, hired lawyers, purchased life insurance,
and established trustsÑall to create a plan that he hopes will enable his
children to keep the family business when he dies.
But all that work and planning may not be enough. Clarence figures that his
son will owe the federal government about $1.5 million upon his deathÑa
difficult sum for most people to raise, but especially so for a man who makes
$31,000 a year. It will be impossible for his son to pay that much, so he may
have to sell all or part of the business. It would be the fourth time that
Clarence's family will have had to pay the death tax. The federal government,
in the end, will have destroyed the work of four generations.
Family Business Horror Story #4
Everett has been in the newspaper business for 30 years. His company
publishes six weekly papers in northern California and the telephone
directory for two counties. He employs 97 people. From his first small
weekly paper, Everett has built his company into a $3 million business.
Nevertheless, all the hard work may be for naught. Everett's wife died two
years ago, and he placed her share of the corporate stock in a trust for their
daughter. His daughter and her husband, who is the publisher for all the
business's publications, will still face a hefty death tax that may cause them to
lose the business when Everett dies.
For years, the number of small, family-owned weeklies has been declining in
northern California. The people who work for the weeklies and the small
towns that depend on these newspapers for information and entertainment
will suffer when these businesses shut down. Abolishing the death tax would
help preserve the legacy of hard work and dedication that thousands of
families like Everett's have given to their communities.
Family Business Horror Story #5
Wayne Williams' family has owned a telecommunications and video
communications business in WashingtonTkstate since 1982. The family's
philosophy is that it is important to reinvest profits in employees, new
products, and expanding opportunities. The company has maintained a
commitment to improving the local community and tied most of its financial
worth up in the business. That means Wayne does not have the cash on hand
to pay the death tax when his parents die.
So Wayne has had to take other measures to save his family from the
devastation of the death tax, including scheduling gifts, buying life insurance,
and slowing reinvestment in the firm. This last action does not mesh well
with the family's philosophy of reinvesting profits, but the death tax makes it
necessary.
The fact that thousands of family businesses are in the same fix explains why
eliminating the death tax is the number one priority of so many owners of
small businesses. It also could explain why a majority of Americans agree
that the death tax is simply unfair and should be eliminated.
Family Business Horror Story #6
David Pankonin, whose story first appeared in The Wall Street Journal, is the
fourth-generation owner of Pankonin's, Inc., in Nebraska. David's
great-grandfather established this retail farm equipment company in 1883 in
Louisville, Nebraska. The business has been handed down three times
through the family, and David hopes that some day he will be able to hand it
down to his own son. He worries because the oddsÑand the estate tax
lawsÑare against him. Only 30 percent of businesses survive a first
intergenerational transfer. Only 4 percent survive to the next generation. A
third transferÑthe transfer that put Pankonin's in David's handsÑusually has
survival odds of less than 1 percent. Now David wonders if the business can
survive another transfer. In his words, "Will I be able to pass the company
inherited from my father along to my son or, in spite of what my will might
say, am I just working hard to pay an heir called Uncle Sam?"
Family Business Horror Story #7
Hard work should have at least some recompense, even if small. Chester
Thigpen, the grandson of a former slave, has spent his life building a small
850-acre tree farm in rural Montrose, Mississippi. It does not create a great
amount of income, but the money Chester has earned enabled his five children
to graduate from college and gave him a tremendous amount of self-pride.
Now, he wants to pass his achievement on to his children.
Chester and his family are among the nation's most successful foresters; he
has twice received the award as Tree Farmer of the Year. Yet when he dies,
the federal government will demand such hefty taxes that Chester's offspring
will be forced to devastate the tree farm just to pay the tax.
"We are not rich people," says Thigpen's son. "My father and I do almost all
of the work on our land ourselves. My father and I planted some more trees
not long ago. He knows he will not likely be here to see them mature. But he
hopes that his grandchildren and great-grandchildren will be able to watch
those trees grow on the Thigpen Tree Farm." Sadly, members of a
socioeconomic group that the estate tax was designed to help could be laid
low by this onerous tax policy.
Family Business Horror Story #8
In Atlanta, the estate tax threatens an African-American publisher's hopes of
revitalizing her family's newspaper and ensuring its success. Fifty-year-old
Alexis Scott publishes the Atlanta Daily World, a biweekly paper her
grandfather started in 1928 with funds he had saved from his work on the
railroad. When he died six years later, he left the paper to his children. About
10 years ago, the business began to falter, prompting Scott to assume the
reins. She hopes that the Atlanta Daily World will remain in the family.
However, Scott sees the estate tax as a threat to her hard work. "It may have a
good intention," she said, "[but] if you are working to build a business in one
generation, it gets cut out from under you in the next. You lose either wayÉIt
just doesn't seem to make sense."
Family Business Horror Story #9
Kennard Campbell owns a small septic tank company in Virginia. He began
his business in 1963, and today employs 15 people, including his son and
daughter who have worked with him since they were teenagers. His son takes
home about $30,000 a yearÑhardly enough to pay the $2 million tax bill the
government will hand him when his father dies.
In order to reduce the death tax bill, Campbell has stopped expanding his
businesses and is considering transferring shares to his children now, rather
than wait until he dies. He would like to invest in insurance and put some of
his money back into the business, but it just does not make sense when his
family will have to pay excessive taxes on any new appreciation. In fact,
Campbell's children may have to liquidate one or two of his businesses in
order to pay the death tax on the remaining businesses.
He is not alone. There are thousands of hardworking men and women who are
forced to sell their family's small businesses, farms, or ranches because of the
death tax. By eliminating this onerous tax, Congress can help these American
families continue to expand their businesses and remain integral parts of their
communities.
Family Business Horror Story #10
Brad Eiffert is a middle-class business owner from Columbia, Missouri.
Even though he is not rich, he pays $36,000 a year in life insurance to protect
his family from death taxes. But he would rather invest this money in his
business and hire another full-time employee. Despite the life insurance
policy, Eiffert may still have to sell his lumberyard, which would also mean
the end of future tax revenues from that business.
"Our business, like any business, is a tax machine!" says Brad. "We generate
corporate taxes, sales taxes, payroll taxes, personal taxes, property taxes . . . I
can't believe the government would give all that for this one-shot tax at the
time of death. It is absurd."
The death tax was created in 1916 as part of the new income tax. Since its
enactment, the death tax has done more harm to family businesses and farms
than it has raised revenue for the government.
Family Business Horror Story #11
Skylar Thompson's family began its grocery business with one small food
store back in 1962. Since then, the business has expanded to 32 grocery
stores in Texas and Louisiana.
Thompson has worked in the grocery business for 37 years. He started
working to earn money in college and is now the president and chief
operating officer. His business has competed successfully against national
chains for years, but this may not last long. His years of hard work may be
lost with the death of his parents. When this happens, Thompson will face
death tax bills of up to 55 percent of the company's assets. These excess rates
would force him to liquidate his assets, halt the future growth of the company,
and risk the employment of his loyal, hard-working staff.
Family Business Horror Story #12
Thirty-four years ago Art turned his living room into an office and began
selling traffic lights and related equipment. With hard work and luck, Art has
turned that home-based business into a $5 million enterprise in central
Florida. He would like to pass it on to his children. The death tax, however,
stands in his way. "People do not build up their business just to sell it," said
Bruce, Art's son and president of the company. "Many are thinking, ÔWhat
about my family?'" Art's family will face a death tax bill of up to 55 percent
of his estate, which primarily consists of the business and the property on
which it stands. Without relief from the death tax, Art's family will be forced
to close the business, sell the property, and pay millions to the federal
government in the death tax.
THE DEATH TAX THREAT TO THE ENVIRONMENT
When people think about the death tax, they tend to focus on its devastating
effect on family businesses and farms. However, the death tax also hurts the
environment. Many landowners, especially those in rural areas, are "land
rich, but cash poor." If the owner of a family business dies, the heirs often
will have to sell their assets because they do not have enough money to pay
the death tax. Since land is valued at its "highest and best use," they must sell
to developers in order to raise the necessary cash. Dennis "Duke" Hammond,
a biological scientist with the Florida Game and Fresh Water Fish
Commission, concludes that "if death taxes were not assessed by the
government, thousands of privately owned acres of land would be protected
from development."Fncite Impact on the Environment Case #1
The Hilliard family is a good example of how the death tax hurts the
environment. The family was forced to sell 17,000 acres of land in southern
Florida to developers to pay its death tax bills. So far, 12,000 acres have
been developed; the rest will soon follow. The family did not intend to sell
the land before the death tax bill and had not made plans to develop it.
The Hilliard's land is in the heart of the Florida panther's habitat. The
panther, is an endangered species, that requires a large amount of land to
survive. The death tax indirectly threatens the panther's habitat every time it
forces local Florida landowners to sell their land to real estate developers.
Today, over 75 percent of species listed under the Endangered Species Act
rely on privately owned land for some or all of their habitat. The death tax
creates a huge burden for those that wish to keep their land undeveloped.
TAX AVOIDANCE
Historically, the death tax brings in only about 1 percent of total federal
revenues. Yet, the costs to administer and collect the death tax, including
litigation, as well as the costs of its economic effects can add up to 65 cents
on every dollar collected. That means net revenue collected from this onerous
tax is just nearly one-third of the total tax collected.[OK?].
According to the Institute for Policy Innovation, the death tax costs the
economy almost as much as it raises for the federal government. This is
because the death tax harms the most potent engine of growth in the
economyÑAmerica's small businesses and their employees. The IPI study
found that if Congress repealed the death tax today, the increase in economic
growth that resulted from this reform would replace any loss to the U.S.
Treasury by the year 2010.
A 1996 Heritage Foundation analysis of death taxes using the WEFA Group
U.S. Macroeconomic Model and the Washington University Macro Model
found that, if the estate tax had been repealed in 1996, then over the next nine
years:
· The U.S. economy would average as much as $11 billion per year in extra
output;
· An average of 145,000 additional job could be created each year;
· Personal income could rise by an average of $8 billion per year above the
current projections; and
· The extra revenue generated by the additional growth in the economy would
more than compensate for the meager revenue losses stemming from the death
tax's repeal.
Wasted Resources Case #1
Robert, an entrepreneur, began investing in Northern California real estate
early in life, making large profits from the resale of his land. He used the
profits to invest in a vineyard in Napa Valley that now has a fair market value
of $20 million.
Robert planned on leaving the vineyard to his children. Two of his three
children work on the vineyard already and they would like to continue to do
so. However, Robert is afraid that when he dies he is going to have to leave
all that he has worked hard to build to the federal government, rather than to
his children. To make sure that his legacy lives on, Robert has spent
approximately $50,000 on legal, accounting, and appraisal bills.
He is also making annual $10,000 gifts to his children and has given away 45
percent of his winery to his children. He has changed his company from a
sole proprietorship to a limited liability company, and has formed a family
limited partnership for the vineyards.
Wasted Resources Case #2
Richard Forrestel, Jr., of Akron, New York, has spent a substantial amount of
time and effort to avoid the devastation wrought by the death tax. Forrestel's
father founded Cold Spring Construction Company. Forrestel stated that, "My
family's construction company has already wasted over $4 million since 1980
in insurance purchases and stock redemptions solely in order to be able to
pay the death tax." "I wish death tax proponents would tell the truthÑthey
simply want to redistribute wealth," continues Forrestel. "The American
dream of my father should not be broken up and sent to Washington when he
dies."
Each day, hundreds of Americans spend more and more money in an attempt
to shelter as much of their estate as possible from taxation after they pass
away, so that their offspring can benefit from their years of hard work. This
money could have been reinvested into the company, creating more jobs and
helping more Americans in their daily lives, but the death tax makes this
almost impossible.
Wasted Resources Case #3
Ronald works at a steel manufacturing plant his father started in Philadelphia
in 1952. Its stainless steel plate products are sold to other manufacturers for
various uses. Ronald and his brother have been working with their father to
develop an estate plan to smooth the transition of ownership from the second
generation to the third.
However, this task has been difficult. Ronald does not have 55 percent of his
business assets in cash so that he can pay off the death tax bill when his father
dies. So, he has to spend his precious time and money on lawyers and
insurance agents. He has to stop the growth of his plant to ensure he can pay
the tax bill. The death tax means that Ronald cannot buy a new piece of
equipment or hire a new employee because he must spend his extra money on
lawyer's fees.
Wasted Resources Case #4
Helen and her husband dreamed of owning a community newspaper. After
years of planning, they finally realized their dream in 1965 and bought a
small, struggling weekly paper in northern Georgia. They invested all their
savings and have turned that small paper into a $2 million business that
publishes three other weeklies as well.
Helen is worried that all of their hard work will go to waste when she and
her husband die. She would like to pass the business on to her sons, but she
may not be able to if the government hands her a 55 percent death tax bill.
Her family has spent thousands of dollars already in legal fees to ensure she
can pass her business on as she and her husband hope, but this still may not
happen. The 55 percent death tax will be levied on the family estate despite
all the corporate and personal taxes they have paid through the years.
Wasted Resources Case #5
The family business of Michael Coyne has lasted through three generations
across 67 years. What started as a small New Jersey lumber company in 1932
has grown into three home improvement stores and a separate kitchen and
bath store. However, the same business that made it through the ravages of the
Great Depression and the shortages of World War II may not survive the
death tax.
Michael's experience with death taxes began 10 years ago when his
grandfather passed away. The majority of the estate was left to his
grandmother; though they obtained appropriate legal representation and death
tax planning, it became clear that the business would not survive after his
grandmother's death.
Michael and his family have contributed more than just stability to their
community for generations. They employ 70 people, and they have paid all
their taxes. Yet for the past 10 years, they have been forced to spend over $1
million on life insurance policies, lawyers, accountants, and other efforts to
protect the business from the death tax. Despite these efforts, the family faces
a death tax bill in the millions of dollars. The business might not survive.
CONCLUSION
Even though many countries such as Australia and Canada do not have a death
tax, the United States continues to reserve its highest marginal tax rate of 55
percent for estates that involve family farms and businesses. The lowest rate
imposed by Washington (37 percent) is nearly twice the average death tax
rate of 21.6 percent in 24 other countries that do impose death taxes. And
while most countries impose a top rate on estates of $4 million or more, the
top death tax rate in this country is imposed on estates valued $3 million or
more. This policy is wrong in a country that built its future on the idea that
with enough hard work and determination anyone could move up the
economic ladder.
By eliminating the death tax, Congress could put more money in the pockets of
Americans who would, in turn, would give more to their favorite charities
and to their communities during their lifetimes as well as after death. While
the death tax was supposed to be a tax on the rich, American families who
work hard to build a family business or farm and their employees of are the
ones most often left paying the bill. The mathematics are simple: The tax rate
on a worker who loses his or her job as a result of the death tax is 100
percent. Clearly, with estimates of the federal budget surplus now exceeding
$1.87 trillion over the next ten years, it's time to do away with this faulty tax
policy.
--William W. Beach is Director of the Center for Data Analysis at The
Heritage Foundation. |
