The Odd Couple: The Estate Tax and Family Law

• Author: Margaret Ryznar
• Position: Associate Professor of Law, Indiana University Robert H. McKinney School of Law.
• Pages: 523-546

The Odd Couple: The Estate Tax and Family Law Margaret Ryznar * TABLE OF CONTENTS Introduction .................................................................................. 523 I. Taxes on Property Transfers at Death .......................................... 525 A. Taxes Upon Death in the United States ................................. 526 1. The Federal Estate Tax .................................................... 527 2. State Taxes Upon Death .................................................. 529 3. Distinctions Between Taxes Upon Death and the Income Tax ................................................................ 531 B. Taxes Upon Death Outside the United States ........................ 532 II. The Link Between Family Law & Estate Taxation ...................... 535 A. Incentivizing Family Behavior ............................................... 535 B. The Private Safety Net ........................................................... 540 Conclusion .................................................................................... 546 INTRODUCTION Besides Benjamin Franklin’s truism that death and taxes are both certain, another exists: their combination does not eliminate inheritance. 1 Copyright 2015, by MARGARET RYZNAR. * Associate Professor of Law, Indiana University Robert H. McKinney School of Law. Thanks to fellow visiting academics at the University of Oxford for conversations on this topic. 1. Lily L. Batchelder, What Should Society Expect from Heirs? The Case for a Comprehensive Inheritance Tax , 63 TAX L. REV. 1, 44 (2010) (“Currently no jurisdiction in the world imposes a wealth transfer tax on the order of 80% to the largest inheritances and none applies a comprehensive inheritance tax.”). However, freedom of testation and inheritance also have their limits. See Adam J. Hirsch, Freedom of Testation / Freedom of Contract , 95 MINN. L. REV. 2180, 2185 (2011). On the contrary, many countries have completely abolished taxes on property transfers upon death. See David G. Duff, The Abolition of Wealth Transfer Taxes: Lessons from Canada, Australia, and New Zealand , 3 PITT. TAX. REV. 71 (2005) (reviewing the abolition of wealth transfer taxes in Canada and briefly describing the abolition of those taxes in Australia and New Zealand); Daphna Hacker, Intergenerational Wealth Transfer and the Need to Revive and Metamorphose the Israeli Estate Tax , 8 L. ETHICS HUM. RTS. 59 (2014) (summarizing the history of the Israeli estate tax from its inception in 1949 to its abolition in 1981); Barbara R. Hauser, Death Taxes Around the World in 2013: Your “A to Zed” Guide on How Other Countries Treat Inheritances , TR. & EST., Nov. 2013, at 62 (listing several countries that have abolished the inheritance tax 524 LOUISIANA LAW REVIEW [Vol. 76 Tax rates around the world are not high enough to infringe on a person’s ability to pass property from one generation to the next, even as dynamic as the estate tax system can be. 2 While some continue to call for significantly higher estate taxes, with the aim to redistribute property or generate revenue for the government, 3 this aim has proven an elusive goal. Many arguments justify the continued existence of significant intergenerational wealth transfers. These include that people will not work or create wealth, or save it, if the government will be the beneficiary upon death. 4 This Article, however, posits another significant reason that the inheritance tax is politically unpopular—the family. As long as people have children, a relatively high estate tax will not be politically viable. Furthermore, family law illustrates the value placed on the private safety net provided by families; 5 indeed, family law and the estate tax are linked in this way. and explaining why they have elected to abandon the tax); Michael Littlewood, The History of Death Duties and Gift Duty in New Zealand , 18 N.Z. J. TAX’N L. & POL’Y 66 (2012) (describing the rise and fall of estate taxes in New Zealand); William H. Pedrick, Oh, to Die Down Under! Abolition of Death and Gift Duties in Australia , 14 U.W. AUSTL. L. REV. 438 (1982) (detailing the Australia death duty abolition movement and providing the underlying reasons for the country’s decision to bar the tax); Vrishti Beniwal, Inheritance Tax Unlikely to be Re-Imposed , BUS. STANDARD (July 5, 2014), http://www.business-standard.com /article/economy-policy/inheritance-tax-unlikely-to-be-re-imposed-114070500092 _1.html [http://perma.cc/FK9W-FRT8] (discussing the unlikelihood that an inheritance tax would be reintroduced in India due to high costs of administering the tax). 2. See Jeffrey A. Cooper, Ghosts of 1932: The Lost History of Estate and Gift Taxation , 9 FLA. TAX REV. 875 (2010); Elizabeth R. Carter, New Life for the Death Tax Debat e, 90 DENV. U. L. REV. 175 (2012); see also infra notes 23–25 and accompanying text. 3. See Reginald Mombrun, Let’s Protect Our Economy and Democracy from Paris Hilton: The Case for Keeping the Estate Tax , 33 OHIO N.U. L. REV. 61, 63 (2007) (“[T]he estate tax should not be repealed because it is the only tax that attempts to prevent uncontrolled wealth accumulation, and the potential damage of permanent repeal to our economy and our democratic system are not worth the gamble.”); Miranda Perry Fleischer, Theorizing the Charitable Tax Subsidies: The Role of Distributive Justice , 87 WASH. U. L. REV. 505, 563–64 (2010) (“The notion of equality of opportunity plays a large role in many tax policy debates, providing one of the most common justifications for the estate tax and other forms of redistribution.” (footnote omitted)); Matthew B. Gaudin, Note, The Federal Estate Tax and the National Debt: Why the Debt Forces A Defense of the Tax , 45 IND. L. REV. 159, 190 (2011) (“[T]he estate tax should be retained, at least for the foreseeable future, and be used solely to reduce the national debt or offset increased spending.” (emphasis in original)); Batchelder, supra note 1 (advocating for a comprehensive inheritance tax). 4. See infra Part II.A. 5. See infra Part II. 2015] THE ODD COUPLE: THE ESTATE TAX AND FAMILY LAW 525 These lessons are important given that taxes upon property transfers at death—the estate and inheritance taxes—are highly dynamic and constantly changing. 6 A few years ago, Congress briefly repealed the estate tax in the United States but then reenacted it in a more favorable form to taxpayers. 7 The tax may now encounter reforms in the United Kingdom, where the estate tax is currently the second highest in the world, following Ireland, 8 and in China, where its introduction has been resisted in recent years. 9 To begin, Part I of this Article examines the estate tax in various societies, both in classic redistributionist societies and in the modern United States. This Part then compares the estate tax to the income tax, analyzing why societies have better tolerated the latter. Part II establishes the link between family law and estate tax law, proposing that any significant changes to the estate tax would require a reimagining of family law. I. TAXES ON PROPERTY TRANSFERS AT DEATH Governments can collect two types of taxes at death upon property transfers: an estate tax and an inheritance tax. While a decedent’s estate pays the estate tax, most often based on the amount of the estate, 10 those 6. See generally Cooper, Ghosts of 1932 , supra note 2 (discussing how policy considerations of the Revenue Act of 1932 are relevant to the current changing landscape of estate and inheritance taxes); see also Carter, supra note 2, at 189. 7. Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38, available at http://www.gpo.gov/fdsys/pkg/PLAW-107publ16/pdf/PLAW-107publ16.pdf [http://perma.cc/4947-QPZT]; Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296, available at http://www.gpo.gov/fdsys/pkg/PLAW-111publ312/pdf/PLAW-111publ312.pdf [http://perma.cc/R7LE-RPHL]. 8. Mark Giddens & Ladislov Hornan, UK and Ireland Have Highest Death Duties of All Major Economies , UHY HACKER YOUNG (Mar. 31, 2014), http://www.uhy-uk.com/news-events/news/uk-ireland-highest-death-duties-major-economies/ [http://perma.cc/V8PV-474Z] (“The UK government would typically take 25.8% from the estate of an individual passing on assets worth US $3m to their heirs, well above the global average of 7.67%.” (footnote omitted)). For a background on the inheritance tax in the United Kingdom, see William T. Thistle, Note, A Comparative Guide of Where to Die: Should the United Kingdom Repeal its Inheritance Tax? , 36 GA. J. INT’L & COMP. L. 705 (2008). 9. Justin T. Brown, Note, Dodging the Draft (Tax): How China’s Draft Inheritance Tax Law Turns a Blind Eye to the Rich, a Good Eye to the Masses, and How a Reorientation Can Be Realized , 12 WASH. U. GLOBAL STUD. L. REV. 161, 163 (2013) (noting that reform introducing an effective inheritance tax has not been enacted yet). 10. See Estate Tax , IRS, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax [http://perma.cc/Z724-ZFX4] (last updated Jan. 9, 2015). 526 LOUISIANA LAW REVIEW [Vol. 76 inheriting property from a decedent pay the inheritance tax, often based on the nature of their relationship to the decedent or the amount inherited. 11 The United States government collects only an estate tax, while American states may collect an additional inheritance tax and an estate tax. 12 Linked closely to the taxes on property transfers at death is the gift tax, which guarantees that people will not simply give away their property during their lifetimes to avoid the taxes at death. Instead, the transferor is taxed on lifetime gifts as well as property transfers at death. In the United States, the Unified Credit allows people to exempt a certain amount of property from the federal estate tax and the federal gift tax. 13 If transferors exceed the credit in either...