Publication Date: Wednesday, Sept. 20, 2000 & Friday,
Sept. 22, 2000
Death to death taxes?
Death to death taxes? (September 22, 2000)
There's plenty of room for compromise between retaining
death taxes and abolishing them
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
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
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
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.