The Estate Tax and Escrow
Welcome to the 3rd installment of Understanding the American Tax Code. In part two we explained how stock brokers can pay a lower tax rate than workers through a special tax called the Capital Gains Tax. When they make profit from selling stock, it is not taxed as income, but as a Capital Gain. Which highlights that you did not work to earn income, you sold an asset. The Capital Gains Tax maxes out at 20% and is often lower than that, while ordinary income tax for a doctor or plumber pays can reach 37%. Now we are going to explore how the wealthy permanently remove their money from the American system through elimination of the estate tax and using escrow accounts.
The estate tax comes into play when a person dies and passes their estate on to a family member. Before we go any further, lets explore the actual numbers on who pays estate taxes. We often hear the cry that the estate tax devastates family farms, this is simply not true. The estate tax only comes into play when the asset is worth over $5.3 million dollars. So how is the wealth tax exploited to avoid taxes? Let’s take the Walton family, they have avoided paying $3 billion in estate taxes alone.
How is the estate tax avoided? First in Walmart’s case you create a company, put all your assets in it and give your children partial ownership, then your technical estate is tiny and your kids just “run the business”. The second way is to give gifts of $15,000 per year to your children, which is tax free. The other method is through the use of charities-
“Another way to bypass the estate tax is to transfer part of your wealth to a charity through a trust. There are two types of charitable trusts: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs).
If you have a CLT, some of the assets that are locked up in your trust will get passed on to a tax-exempt charity. By donating to charity, you’ll lower the value of your estate and end up with an extra tax break. Once you die (or after a pre-determined period of time), whatever’s left in the trust will be passed on to your beneficiaries.
On the other hand, if you have a CRT, you can transfer a stock or another appreciating asset to an irrevocable trust. Throughout your lifetime, you can make money off of that asset and when you die, your investment income will be donated to charity. In the process, you’ll avoid the capital gains tax and lower your estate tax burden. Plus, you’ll score a tax deduction.”
The next property related topic is Escrow, or Escrow Accounts. By law, taxes must be made once money changes hands. So if you own property and sell it for more than you bought it, as soon as that money is given to you, you owe the American Government taxes. However there is a caveat that the wealthy exploit in tandem with the estate tax loopholes- Escrow. Putting something in Escrow is like selling property and it’s going into a sort of limbo. You hire a tax attorney, then you find another larger piece of property you like, because you are selling for a gain. When your original property is sold the money goes into a third party account that you cannot access, controlled by your attorney. The attorney then purchases the new land and gives you the deed. Because money never touched your hands, you never “cashed out” you don’t pay any taxes. And the process goes on and on over time as you amass more and more property. Then you die and your kids can cash it out tax free and begin the process again.