Publication Date: Wednesday, Sept. 20, 2000 & Friday, Sept. 22, 2000

Death to death taxes?

By Harold Justman

In the last two years, Palo Alto real estate values have been the hottest in 40 years for many Palo Alto homeowners. Rising home prices spell riches for the vast majority of homeowners. But a silent partner is quietly moving in on these real estate riches: the IRS. With the median sales price of a Palo Alto home exceeding $1 million, the IRS stands to receive large sums of money in the form of estate taxes when homeowners die. Some politicians now call estate taxes a death tax, a term that is intended to arouse opposition to estate taxes.

Estate taxes are intended to redistribute wealth from the rich to the federal government to support programs helping the poor. However, some of the so-called rich in Palo Alto do not necessarily fit the stereotype of the politically unpopular rich. There are people who bought homes in Palo Alto in the 1960s, such as schoolteachers, retired military officers, nurses, gardeners and plumbers, who lived financially modest lives. The once modest homes of these hardworking people are now worth a modest fortune.

For these homeowners, rising real estate values do not put more spending money in their pockets because they are retired and living in the homes instead of selling them. As a result, many so-called rich continue to live modestly.

Nonetheless, the IRS is ready to take up to 55 percent of the value of a home that exceeds the available estate-tax exemption. With a present estate tax exemption of $675,000, clearly the estate of a Palo Alto homeowner is going to share hundreds of thousands of dollars with the IRS. While for married couples there is no estate tax levied on the deceased spouse's estate if it is left to the surviving spouse, the surviving spouse's estate can be subjected to large estate taxes when it is the children's turn to inherit the family home.

Some children are forced to sell the family home in order to pay the estate taxes. The result is that a schoolteacher who lived modestly but owned a home in Palo Alto cannot leave his or her home to a child who also became a schoolteacher because the child will not be able to pay the estate taxes due on the home. A second generation schoolteacher in Palo Alto cannot afford to buy a home in Palo Alto and cannot keep a home even if he or she inherits one. If one form of affordable housing is an inherited home, then estate taxes are death to that form of affordable housing.

Estate planners will tell you that you can avoid paying estate taxes. However, the generally accepted way for a surviving spouse to avoid estate taxes is to give away portions of the estate before death. There is no escape from the conclusion that estate planning can result in a loss of control over the hard-earned fruits of one's life-long labor. Also, the dark side to estate planning is that some children, as soon as they obtain partial control over a portion of the parent's estate, become impatient to control it all. Family disputes over control of real estate are commonly the subject of litigation.

As a lawyer, my experience has been that litigation destroys family relationships. Also, disputes over estate plans will destroy family relationships. There are many individuals in Palo Alto who have accumulated large estates. To their credit, many of these individuals have created jobs and careers for others while building a large estate. Also, these individuals have generously donated monies to local charities to improve the quality of life in Palo Alto. These rich individuals invest their resources locally. Estate taxes sent to the federal government are less likely to be spent locally.

In an election year, the politicians will debate estate taxes in emotional terms. Those opposed to estate taxes will call them death taxes. Those in favor of estate taxes will talk about the need to take from the rich and give to the poor. History teaches us that logic is never politically popular. Palo Alto homeowners looking for a logical debate about estate taxes will be disappointed by the political debates regarding estate taxes.

The subject of estate taxes warrants more than a political debate. Clearly, the existing estate tax exemption is too low for Palo Alto homeowners. However, abolishing estate taxes is not an acceptable solution. Fortunately, there is plenty of room for a compromise between abolishing estate taxes and maintaining the existing tax law. With luck, the politicians can find some common ground on the issue of estate taxes.

Harold Justman has lived in Palo Alto since 1964. He has specialized in real estate law for more than 20 years and is often asked to lecture on real estate law to attorneys and real estate brokers. Send questions to Justman care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302.