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Why ‘death taxes’ might not be your enemy

For most of us the big financial question for our retirement is whether we’re going to have enough money to last us until we die, or whether we’re going to end up impoverished in a nursing home paid for by Medicaid.

The question of whether or not we’ll have anything left over for a major “legacy” is moot at best.

So you have to admire, in a way, the astonishing multidecade propaganda campaign that made “estate taxes” some kind of mainstream concern.

In the 1990s (when my father died) federal estate taxes kicked in at $600,000 and rose quickly to 55%.

This year? They don’t kick in at all until an estate hits $11.7 million, or more than $23 million if you’re a couple…and they don’t become significant until an estate is worth several million dollars more than that. The top rate is just 40%.

Oh, and there are ways and means of raising those thresholds higher still if you have good tax lawyers and accountants.

A new study of Federal Reserve data shows just how “mainstream” and middle class this really is.

For half of all American families—the poorer half—the average amount they expect to inherit from parents, uncles and so on is $39,000, reports MagnifyMoney, a financial website operated by Lending Tree. TREE, +2.78%

For the richer half, excluding the top 1%, the average is about $270,000.

But for the top 1%? Try $1.7 million. And that’s only an average. For the 0.1%, or the 0.01%, the numbers are astronomical.

Thank heavens we have made it easier for their kids to avoid work, even if it is at the cost to the U.S. Treasury.

The campaign against the estate tax, labeled “the death tax,” has been a masterpiece of public relations. There was a lot of mention of “family farms,” but the real beneficiaries wouldn’t be caught dead on a farm (though some of them may own a ranch).

Those in retirement, and those planning for retirement, may think somehow that effectively abolishing the “death” tax is a good thing for them. Quite the reverse.

First, you’ll never see the benefit. It only kicks in after you die.

Second, scrapping the tax on any money you leave behind means, mathematically, that you had to pay more tax on all the money you earned and saved during your life. Tax dollars have to come from somewhere (yes, unless we completely abolish the state), and any revenue we don’t collect from the money people inherit will come instead from income and capital-gains taxes.

That goes for your heirs too, naturally. They will have to pay on balance more taxes on all the money they actually earn and invest during their lives to pay for the freebie on your legacy.

Incidentally, with the Congressional Budget Office predicting eye-watering federal deficits as far as the eye can see, and Social Security in crisis, there’s a pretty good chance those taxes are going to rise in the years ahead.

Every time I have tried to debate the estate tax with people, they keep raising arguments against tax in general. Yes, yes, taxes can be a burden on private citizens, a drag on the economy and whatever. But that’s got nothing to do with estate taxes versus other taxes.

It is perverse that we tax money we inherit at 0% but the first nickel we earn at 15.3% (which is the true payroll tax). As someone once joked, “this gives people an incentive to have rich parents, and therefore helps eliminate poverty!” As life now imitates satire, it can’t be long before this is offered as a talking point by someone.

As for the phrase “death tax“: If we have to tax someone, isn’t it better to tax the dead than the living?

There’s a third benefit to inheritance taxes. They may encourage those in retirement to make one of the smartest financial moves they can make: Buying an annuity.

Financial experts have long grappled with what is called “the annuity puzzle”: The failure of many people in retirement to take the logical financial step of insuring themselves against the costs of a long life by purchasing an annuity. These are insurance products that produce a guaranteed income for life. If you die at 70 you won’t care. If you live till 105 you will.

Read: Are annuities so bad?

But in the interest of balance, let me raise at least one benefit for ordinary middle-class retirees of the (effective) abolition of the estate tax. Sure, you probably don’t have a ton of money to leave to your kids and grandkids. But…they don’t know that.

You’d be amazed at how many young people assume the elderly are sitting on a ton of hidden assets.

So just keep muttering every so often about “The Money,” and they’ll come by and see you a bit more often in your dotage. By the time they realize there’s nothing left, you’ll be gone.

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