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Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.  ~Oscar Ameringer

I was in Atlanta a few months ago at a seminar with a bunch of tax and real estate attorneys discussing Estate planning when we came across a powerpoint slide with the schedule for the Federal Estate Tax.  You've all probably heard of the "Bush tax cuts" and the steady bickering about making them permanent or rolling some of them back to 2000 levels when they sunset in 2011.  They are trying to shift our focus to the rich not paying their fair share in terms of income tax rates and get us all worked into a frenzy about what is fair and scare us into believing the deck of cards will fall if the their bloated government and massive spending programs aren't funded.

Don't let these clever little clowns distract you from what is really going on.

There is something sinister afoot in DC and (let me adjust my tin foil hat again) I can see the possibility of a total economic collapse in 2011/2012.  I said possible because I have nowhere near the brain capacity or macro-economic sense to even pretend to understand the implications of what will happen in 2010, but it doesn't take a economic scientist to see quite clearly we are in for a major, never seen before shift of wealth in this country.

Lets look at the Federal Estate Tax schedule under the Bush and GOP led congress tax plan.  If you need a quick primer on you can click to this Wiki.

Federal Tax Rate, Bush Tax Cuts 2001 through 2011

Year    Exclusion    Rate
 
2001   $675,000     55%  
2002   $1 million    50%    
2003   $1 million    49%    
2004   $1.5 million 48%    
2005   $1.5 million 47%    
2006   $2 million    46%    
2007   $2 million    45%    
2008   $2 million    45%    
2009   $3.5 million  45%    
2010   repealed         0%    
2011   $1 million     55%

Did anything pop out at you when you look at the estate tax schedule?  If not look again and close attention to tax rates in 2010 and 2011.  Does this make any sense to you?  Why would we have a progressively higher tax exemption, progressively lower tax rate and then quite literally a "free for all" in 2010 and then regress back to 2001/2002 levels in 2011?

Follow the money and connect the dots.  If you've taken an interest in history you can recall the 'Gilded Age' where fortunes were amassed in railroads and banking.  The Gilded Age spawned into the Industrial Age where steel, oil, factory and car magnates were amassing huge stockpiles of wealth.  I won't get into a history lesson here other than to point out that a significant portion of the US economy was concentrated at one time in the hands of very few individuals we called tycoons and robber barons.  These men controlled tens if not hundreds of millions of dollars in US, gold backed currency at that time.    This wealth has been carefully structured in tax free trusts and foundations, generating compound interest for long, long time now.  Just to get an idea of the magnititude of wealth, a $1,000,000 one time deposit in a trust account 90 years ago compounding at 6% is worth $189,464,511.23 today.

Here is a partial list of some of these businessmen considered Robber Barons...

John Jacob Astor (real estate, fur) - New York City
Andrew Carnegie (railroads, steel) - Pittsburgh, Pennsylvania
Jay Cooke (finance) - Philadelphia, Pennsylvania
Charles Crocker (railroads) - California
Daniel Drew (finance) - New York state
James Buchanan Duke (tobacco) - near Durham, North Carolina
James Fisk (finance) - New York state
Henry Flagler (railroads, oil, the Standard Oil company) - New York City and Palm Beach, Florida
Henry Clay Frick (steel) - Pittsburgh, Pennsylvania and New York City
John Warne Gates (steel, oil) - Chicago and Texas
Jay Gould (finance, railroads) - New York (both state and city)
Edward Henry Harriman (railroads) - New York state
George Hearst (gold)
Collis P. Huntington (railroads) - California, Virginia, and New York
Andrew Mellon (finance) - Pennsylvania
J. P. Morgan (finance) - New York
Mark Hopkins (railroads) - California
John D. Rockefeller (oil) - Cleveland, Ohio
Leland Stanford (railroads) - Sacramento, California and San Francisco, California
Cornelius Vanderbilt (railroads, shipping) - New York City, New York
James J. Hill (railroads) - St. Paul, Minnesota
George Mortimer Pullman (railroads) - Pullman, Chicago

Do you recognize some of those names on the list?  None of these men got to where they were by being stupid or naive.  I can assure you that their fortunes were structured and safe in foundations and trusts when they passed and their heirs have been living just off of the interest these stockpiles of wealth bring about.

If you had $10,000,000 in a trust today, what would you do?  Cash it out now and pay the US Treasury $3,600,000?  Cash it out in 2011 and pay $4,050,000 to Uncle Sam?  Wouldn't it be wise to wait until 2010 and cash out $10,000,000 and $5,000,000 in your left pocket and $5,000,000 in your right pocket?

What do you think is going to happen in 2010 when the hundreds of billions if not combined trillions of dollars of wealth in foundations and trusts can be moved, sliced, diced and pared tax free?  You can bet your marbles that anyone with half-a-brain would leave anything more than $1,000,000 for the government to tax in 2011 and beyond.  I'm sure the trustees and directors of mega-trusts and foundations already have a very comprehensive plan to move money out and into safe, tax-free shelters - many of them will be overseas.

So while billionaires like Mr. Buffet and our princes and princesses in DC direct our attention to income tax rates (which the wealthy do not contribute to), to feed a growing deficit and and out of control budget that they refuse to constrain.  They label hard working income producing families making $150k a year "the rich" and want to shift even more of the responsibility to feed their bloated budget...knowing full well that they provided the day for their puppet masters to take trillions of legitimate TAXABLE dollars (this money was never taxed to begin with) off the table.

I hope I explained this well enough for you to get the gist.  Would like to hear what you think because I personally think this is the scandal of all scandals.

In a semi-famous bit of demagoguery, the world's third richest man and second richest in the richest country in the world harped at Hillary Clinton fund-raiser last June that the marginal rate he pays in taxes is less than his secretary.  My first thought was that instead of feeding the masochists that believe our tax rate is to low, perhaps Mr. Buffet should pay secretary a little more and give her access to the army of tax attorneys and financial advisors he employs.  My second thought was how completely absurd this statement was made at a million dollar $4600 a seat tax-free fund-raiser for an already very wealthy woman.

According to published articles Mr Buffett, who is worth an estimated $52 billion, said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.  His point was summed up clearly in this statement "The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent."

I have a mucho respect for Mr. Buffet's business sense but I've got to question his intentions.  First of all, I find it hard to believe that Mr. Buffet nor any of the other 400 "richest 1% of humanity" in the audience consider themselves lucky.   Minor point but there is no doubt that very few people achieve wealth through luck nor do I seriously believe they seriously believe their fortunes are based on luck.   Don't get me wrong, I don't begrudge Mr. Buffet for his riches and for paying as little tax as possible.  I commend him (like it really matters) for his uber-generosity towards charity organizations and according to some quick math am thankful he has forked over $8 million and change to our US treasury last year.  What puzzles me that I seems he believes he isn't taxed enough.  Even though my take from his speech is that his secretary is taxed too much, if Mr. Buffet truly feels the tax code favors the "luckiest 1% of humanity" way then what is stopping him from writing a check for an another 5.8m to the IRS to level the playing field at 30% and achieve parity with his secretary?

Are you aware that "Tax Freedom Day" was April 30 in 2007. That means you worked 4 months out of the year just to pay your Federal Taxes. That does not include your State Taxes, your Property Taxes, Municipal Taxes, Sales Taxes, Gas Tax, Fees, Service Fees, Surcharges, Fines, Assessments, etc. etc. etc.  I don't get people like Mr. Buffet and his "richest 1% of humanity" crowd with solid business minds and ultra-savvy business sense looking to hard working middle-class people for higher taxes rather than rail against an ineffective and out-of-control government to reduce spending.  I think I need to adjust my tin-foil hat a little South to clear this picture up. 

But nonetheless, I need to get off my soap-box.  The real point I want to make here and through a series of blogs in the coming weeks is that everything Mr. Buffet applies to reduce his tax rate to 17.7% and protect his $56 billion is perfectly legal and believe it or not available to you and me - well most of it at least (another topic, another day).  Generally speaking, we just don't have the understanding, knowledge and perspective to see that an accountant or tax attorney that may cost us $1000 to help us avoid "volunteering" an additional $5000 to the IRS nets us 4000 crisp-clean dollar bills.  That's real money that pays for a lot of real bills.  But, if you are anything like me tax time comes around and that $1000 needed to save $5000 is AWOL.  Well talk later about money and debt management and I'll try to give some proven tips and techniques to ensure you have that $1000 when you need it to save (make) $4000, but I don't want to get too far from discussing ways to minimize the impact and influence of our life and business partner, the IRS.

First of all, I'd like to explode the myth that giving taxes is a patriotic thing to do.  Here is a famous quote from a man who is considered by many to be the most influential American judge never to have served on the Supreme Court of the United States, Justice Learned Hand...

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.  Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

What a great quote and awesome name for a judge...Learned Hand.

It's late and believe it or not I need to work on some tax-related stuff before I retire.  No, I don't have it down pat and am still learning more and more about the subject at hand.  It's hard work but the way I see it is that it will return tens if not hundreds of thousands of dollars over the rest of my life.  That, my friends, is a provable fact and easy to quantify and we can do just that next blog post.  I hope you stick with me for at least the next few blogs as I try to give you what I've learned to discover real tax savings and the affiliated asset protection strategies the rich and famous like Mr. Buffet use to shamefully boast about their 17.7% marginal tax rate.  We'll explore entity structuring, estate planning, trusts, foundations, IRA's, HSA's, MSA's, 401K's, and whole bunch of other confusing acronyms and hopefully we can learn enough together to save some real money next year.  Like it or not, the IRS is your business partner and probably one of your largest shareholders and if you don't plan correctly, the IRS will be more than happy to also one of your heirs. The share of your profits or your estate going to the IRS and its state and municipal bedfellows depends in large part on understanding tax laws (not loopholes - mythbuster #2) and the effectiveness of your tax planning. 

Oh, before I go I must provide you the following....

Tax Disclaimer

The information contained herein should not be used in any actual transaction without the advice and guidance of a professional Tax Advisor who is familiar with all the relevant facts. The information contained here is General in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters. Russ Palermo nor Liaison Properties LLC assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein.

My Best to you and your family - - - - Russ Palermo, Liaison Properties LLC