Estate Taxes are an effective vehicle the aristocracy employs in stealing money from the body politic. The Estate Tax works, in public theory, by imposing a tax on individuals who die owning a certain amount. The amount is currently $5 million, slated to reduce to $1 million in 2013. Assets owned beyond that amount (let's call it $1 million for purposes of discussing the future) are taxed at a high rate, let's call it 50% (slated to be 55%).
So, if you died owning $1.5 million worth of assets, you would get an exemption for the $1 million, and you would pay a 50% tax on the remaining .5 million. Thus, $500,000 would not be exempt, and you would pay a tax of $250,000. The amount remaining for your heirs would be $1.25 million.
However, this is an unacceptable level of taxation for the aristocracy. In order to avoid paying their fair share, one of the major tools of their trade, as important as the lockpick and dagger to the less well-heeled thief, is the marital deduction. The marital deduction allows someone who dies to give as much property as they want to their spouse without having to pay any estate tax on it. Goodness knows it would be terrible if an aristocrat had to struggle to survive with only $1 million and change.
Aristocrats run into a problem when they use the marital deduction, though: namely, once the surviving spouse dies, all of the money that spouse received from the first spouse to die is in the surviving spouse's estate. That means it is supposed to be subject to estate tax.
So, imagine that Harry and Wilma each owned $1 million of assets. Harry dies and leaves his $1 million to Wilma. Wilma now has $2 million. Because of the marital deduction, Harry pays no estate tax. When Wilma dies, though, she has $2 million. $1 million is exempted using the $1 million credit mentioned above, and the remaining $1 million is taxed. At our 50% rate, that's a $500K tax bill. Harry and Wilma's poor heirs have to make do with only $1.5 million.
Thankfully for the said elites, however, there is a solution to this conundrum, and a way to steal back a lot of that tax bill from the body politic. This solution is called a tax (credit shelter/AB/bypass) trust. These are incredibly common "estate planning" (tax theft) devices used by the minor aristocracy, or those households that have assets in the several (but not dozen) millions. They also represent one of the first and easiest levels of theft employed by the high aristocracy, because of their foolproof protection of several million in assets. For now, though, we will focus on the minor aristocracy (the Outer Party, as it were).
The tax trust solves two problems. It 1) allows the surviving spouse to keep all the money, but 2) without having to pay taxes on the deceased spouse's half (or on their own community property share, depending on the state where they died).
But how can this work? If the estate tax is imposed at death, how do Harry and Wilma get out of having it imposed when they die? The IRS has done its job coming up with complicated regulations that allow for the tax trust to steal money from the rest of America, and keep it for the wealthy, despite the appearance of an estate tax that only actually affects those not savvy or established enough to take advantage of avoiding it. Here's how it works:
Harry dies, owning $2 million. He uses his personal $1 million exemption to shield $1 of the $2 million from tax, which shielded $1 million he gives to an imaginary person called a credit shelter trust. The remaining $1 million he gives to Wilma tax free, using the marital deduction. So, Wilma now has one of Harry's millions in her name, and when she dies, her own credit will keep it from being taxed.
Meanwhile, Mr. Tax Trust owns $1 million. Strangely enough, Mr. Tax Trust has to do whatever Wilma likes. If Mr. Tax Trust makes any money off his investments, or has any other income at all, he has to give it all to Wilma. If Wilma needs money for her "health, education, maintenance and support" (shelter/mansion? clothes/prada? food/salmon? car/mercedes? anything in the world?), then Mr. Tax Trust has to give Wilma any of the original $1 million she asks for. Also, Wilma manages all of Mr. Tax Trust's bank accounts. She gets his statement and carries his checkbook. She signs the checkbook. She decides whether she needs any money for her health, her education, her maintenance or her support, and if she does, she writes herself a check. I.e., illusions aside, it's actually Wilma's money.
Then, when Wilma dies, Mr. Tax Trust pays no estate tax on "his" million, and Wilma pays no estate tax on "her" million. Because, you see, Mr. Tax Trust is a trust, not a real person. So, even though he can do all the things described above, he doesn't have to be responsible to the other taxpayers for little things like the estate tax.
Guess who gets the money from Mr. Tax Trust when Wilma dies? That's right: little Joey, the same heir to Harry and Wilma that was going to get the money in the first place. However, since Joey was exempted from paying estate tax on the money owned by Mr. Tax Trust, his tax bill is now gone. Let's figure it out.
Without Mr. Tax Trust, Harry would give $2 million to Wilma when he died. No tax due because of the marital deduction. Then, when Wilma died and gave $2 million to little Joey, she would use the $1 million estate tax exemption, leaving $1 million to be taxed, resulting in a $500K tax bill, and $1.5 million net to Joey.
With Mr. Tax Trust, things look a lot better for them. Harry gives Wilma $1 million, and Mr. Tax Trust $1 million. No tax due on any of it when Harry dies, because of the marital deduction (for the $1 million to Wilma) and the estate tax exemption (for the $1 million to Mr. Tax Trust). Then, when Wilma dies, we pretend she only has $1 million--not the $2 million she actually has if you are a person who doesn't believe in fairies or tax trusts.
Thus, little Joey gets $2 million tax free from his Harry and Wilma. He (and Harry and Wilma's ghosts) have just stolen half a million dollars from the rest of the country.
This theft only works if you believe in imaginary beings named Trust, who are allowed to hold property, but don't live, eat, breathe, work, or operate under the same rules as human beings. Because Trusts can be complicated to create, lawyers are able to charge between $2K-$10K for creating them. And as a result, every time a tax trust bypasses the estate tax, elites will steal ~$500K from America (depending on the applicable tax rate).
Why does this work? Because of the fact that, as previously discussed, imposing tax burdens on "everyone," and then exempting only certain people in complicated ways, does not feel as much like theft to the victims. When the masses believe they are paying their fair (or reasonably fair; "everyone cheats a little!") share of taxes, as opposed to writing checks directly to people with millions of dollars in their credit shelter trusts, they are less likely to make trouble about it.
The avowed purpose of the estate tax is to ensure that the immensely rich have their massive fortunes gradually broken down, so that the wealth can be spread around the economy for investment, economic growth, and the benefit of the body politic. The core idea is that any amount over $1 million (or whatever the "exemption amount" is later called by the wealthy Congressionals) should be taxed before it can be passed on for continual hoarding: even when passed between individuals who happen to be economically united in two-person Judeo-Christian marriage. However, the tax trust scheme allows the aristocracy to bypass the individual exemption amount, and double it for those (wealthy) people established and clever enough to dodge the regime that everyone else has to live through.
Succeeded in Part 3.