Thursday, December 02, 2010

Why does Warren Buffett favor the estate tax?

Because it made him rich.

A new report from the American Family Business Foundation documents the $10 million a month the life insurance industry has been spending to try to get death taxes returned to federal system. Buffett owns six life insurance companies.  He also reportedly likes to buy businesses when their prices are depressed due to  impending estate tax obligations.  The report identifies the folks behind the lobbying effort as well.


David Repp said...

Your suggestion that Warren Buffett favors the estate tax because it will make his life insurance investments more valuable seems incongruous with his 2006 pledge to give 85% of the value of his Bershire Hathaway stock to charities.

Why would the value of a business be "depressed" simply because of an impending estate tax obligation? Are you suggesting that full fair market value cannot be realized because the sale must occur within 9 months after date of death to pay the estate tax? If so, then someone must not be aware of Internal Revenue Code § 6166 that provides a very low interst rate loan to estates to pay the estate tax on businesses.

Jim Gust said...

@ David: Why should Warren Buffett be allowed to direct where 85% of his wealth goes and get a 100% tax deduction for it? Because we all like his choices? The charitable deduction is the single most abused dodge in the tax code, in my view. Warren Buffett should be required to pay the estate tax he advocates for everyone else, not hide behind the protections of nonprofits.

Surly you are joking about thinking that §6166 can repair the valuation hit a business experiences? §6166 is about liquidity, not valuation.

I can choose to buy one of two businesses, identical sales, same prospects. Each business is worth $10 million based on sales and profits. However, one business now has a $2 million estate tax attached to it. True, the tax can be paid over time. But paying the interest on the tax will impair my profits, and paying the tax itself is not deductible and that obviously reduces the value in the hands of the heirs.

The issue of "forced sale" of the asset in nine months will further depress the value of the business, but that is secondary to the value impairment of the estate tax obligation.

However, when Warren buys the company, his purchase price is net of the estate tax, that burden falls on the sellers. So he gets rich, per the note above.