An OECD report recommends imposing an inheritance tax in Israel, to reduce wealth & social inequality and increase government revenues. But high Net Wealth (HNW) individuals know how to handle inheritance tax (ask Jeff Bezos), so any such tax will ultimatlly harm middle-class asset owners. An opinion column, by Adv. Idan Ben-Yacov

The OECD recently published a report with a recommendation to impose inheritance tax in the 12 states in which no such tax exists, including Israel, and simultaneously to implement far-reaching reforms in most of the 24 states that already have inheritance tax, “Calcalist” website reported.

According to Calcalist, the purpose of the report was twofold: first, to increase state income in the wake of COVID19 and its effects on the worlds’ economics. Israel, for one, is grappling with a huge deficit and is looking for ways to reduce it.

As indicated by the recommendation to impose inheritance tax rather than estate tax, the second purpose is obviously to reduce inequality. Inheritance tax is more progressive, and will likely encourage division of estates among more heirs, thus reducing the concentration of wealth.

OECD economists further explain that “longer life expectancies and wealth concentration among older age groups could further reinforce inequality”. Moreover, “Wealthier households are reporting higher-value inheritances, a trend which is likely to persist as asset prices continue rising and the Baby-boom generation ages”. The authors of the OECD report apparently see this as a vicious cycle that perpetuates and increases the gaps. 

As we have written before, inheritance tax is not effective, and would in fact be a blow to middle class asset owners.

The middle class will end up paying

Ben-Yacov Law Firm has assisted many clients with personal wealth management and generational wealth management. Significant number of our clients are the “everyday Joe”  people with 2 or 3 apartments on which they depend for their retirement income. If these assets were not their source of income at this age, they would have passed them on to the next generation, if only to avoid inheritance tax.

For them, inheritance tax would lend a major blow to the family’s finances.

At the same time, the ultra-rich will be able to work around this new tax as well. They know all the loopholes (or are able the professional who know) through which they can transfer wealth before they die. The late Michael Strauss used a trust fund, for example. 

There are other ways for planned transfer of capital to family members, which can circumvent all inheritance taxes. This advantage is on top of the inherent ones that trust funds provide, of keeping the wealth in the family and looking after future generations.

See for example ProPublica’s recent article about Jeff Bezos: Bezos planned his wealth so carefully, that in 2011, with a fortune of 18 billion USD, he claimed and received a $4,000 tax credit intended for families earning less than $100,000, ProPublica reports.

“Wealth” is not a dirty word

What Bezos and others have done is not cheating. It is legitimate tax planning, employed by most tycoons. However, this practice undermines the hope that inheritance tax would reduce inequality.

OECD economists reject the “double tax” argument with a counter-argument about VAT – common people too pay VAT on their salary and on products and services that they purchase. To that we answer: two wrongs don’t make a right.

Let’s take a wealthy factory owner, who paid taxes all his life on his assets and profits, in addition to the workplaces and economic growth he generated for his country. Is it just and right to impose inheritance tax on an asset transfer that was forced (by his/her death) on him/her and his/her heirs, such that taxes should be paid again on the same assets?

Furthermore, assuming this person worked hard all his life, and spent a lot of money over the years in order to carefully plan and reduce his tax burden; what is to stop him from using tax planning to circumvent inheritance tax on the money he plans to leave for his heirs? Can we really make sure that the tax system is air-tight and the money will make its way to the state and reduce economic inequality?

The fact is that very few businesspeople refrain from tax planning. Even those who support welfare state policies and tax increases, use the services of lawyers and accountants, to help them optimize their own profit. 

The tax system is “one size fits all”. It sets general rules within which each person needs to plan their own moves to enable them to make a good living, keep reserves for rainy days, and good forbid- maybe even get rich.

To conclude, if the state imposes an inheritance tax, High Net Wealth individuals and businesspeople who would stand to suffer additional tax (and even double tax as mentioned) will likely know how to handle this and adapt their tax planning to minimize the impact on them.

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Adv. Idan Ben-Yacov of Ben-Yacov Law Firm, handles wealth management, real estate, local and foreign investments, privacy law, and consults mature and startup companies.

Thinking about how and when to transfer your wealth to future generations? Contact us and we will tailormaid the best solution for your needs.