The estate tax

[Peregrine]

The AMT won't be able to fly under the radar for much longer. Every year that goes by, more and more people who don't consider themselves rich, and who really aren't by any reasonable standard, are getting hit by it.

I can understand Congress' resistance to repeal Corporate AMT - it's a large money maker for them. But individual AMT isn't doing what it was intended to do any longer. It really needs an overhaul.

I think you'd be surprised how much money they bring in with the Individual AMT. The fact is, it's always better for Congress to be able to claim to be lowering taxes, while knowing that the AMT will, each year, be bringing back "secretly" more of that lost revenue. A change in the AMT, though sorely needed, would be brutal to pass, as the revenue lost would be huge, no one's going to support a trillion dollar budget deficit, just as they're starting to make a dent in what we have now. But at the same time no one wants new or higher taxes.

[Galaxy]

Originally Posted by Farrah Whitworth-Rahn

You mean do wealthy people pay the estate tax?

Sorry, I meant the question and the statement as two seperate things. My question was, do alot of people who inherit wealth, manage to keep it, or does it begin to go?

[digamma]

Originally Posted by Farrah Whitworth-Rahn

The AMT won't be able to fly under the radar for much longer. Every year that goes by, more and more people who don't consider themselves rich, and who really aren't by any reasonable standard, are getting hit by it.

I can understand Congress' resistance to repeal Corporate AMT - it's a large money maker for them. But individual AMT isn't doing what it was intended to do any longer. It really needs an overhaul.

Yup. With housing prices increasing like they have in the last few years, a mortgage payment for a near-median priced house almost guarantees AMT in southern California.

[Jesse_Ewiak]

Simple way to make sure the estate tax doesn't kill all those supposed family homes and farms....bring the exemption up to five or ten million.

Simply put,if you have that much in assets and don't do some sort of planning for after your gone, it's your fault, not the evil gubermint' that your sons and daughters get soaked.

[mhass]

Originally Posted by Galaxy

Do heirs to big-funds inherited wealth manage to keep it, or dispell it? My beef with the tax is that the rate is extremely high.

The rate is high and the estate has been taxed already at least once or twice. It poses the greatest risk to small business owners who, by nature of their ownership, have the business included in the value of their estate, thereby creating a tax burden on something that's almost entirely illiquid. So if the owner of my company dies tomorrow, his heirs will need to sell the business or 50% (effectively gutting the enterprise) of it just to pay the tax. Farmers also get nailed, especially if their land has appreciated in value (like farmland near the expanding exurbs). The $2 million exemption (or something close to that) doesn't protect many businesses today.

And the very wealthy, yes, pay a good chunk of estate tax dollars. The alternative, and Farrah can correct me if I'm wrong, is to let the estate sit in a trust that isn't controlled by the heir(s) (spouse excluded).

[Farrah Whitworth-Rahn]

Originally Posted by Peregrine

I think you'd be surprised how much money they bring in with the Individual AMT. The fact is, it's always better for Congress to be able to claim to be lowering taxes, while knowing that the AMT will, each year, be bringing back "secretly" more of that lost revenue. A change in the AMT, though sorely needed, would be brutal to pass, as the revenue lost would be huge, no one's going to support a trillion dollar budget deficit, just as they're starting to make a dent in what we have now. But at the same time no one wants new or higher taxes.

I agree - to a point. A change in AMT would be difficult to pass, especially in this Congress. It's too closely divided, and the desire to make a change on the GOP side isn't as strong as some would like.

Any change that would be proposed would include revenue offsets making the bill revenue neutral, aka tax increases in other areas so the net effect of the legislation is zero. Lately the m.o. for folks in Congress has been to increase fines and penalties on what they call "Tax Shelters" or closing what they call "tax loopholes" for corporations. A lot of these offsets are nothing more than disallowance of deductions for corporations. For example, with the passage of the latest tax act in October of 2004, Congress decided it wanted to limit deductibility of corporate owned airplane expenses. Good for me - the rules they came up with are beyond complex, which means job security Bad for corporations - expenses that were once deductible are not and their tax burden goes up. Congress gets away with it because as a former Senator once told me - "Corporations don't vote".

However, as AMT creeps up on more and more individuals - people who are not considered rich, more like upper middle class - the pressure for these politicians will become so intense they'll have to do something about AMT. Pressure from rich donors who were already subject to AMT, and pressure from "average Americans" just finding out that not only did their property taxes skyrocket with the value of their home, so did their income tax bill due to AMT.

[Farrah Whitworth-Rahn]

Originally Posted by mhass

And the very wealthy, yes, pay a good chunk of estate tax dollars. The alternative, and Farrah can correct me if I'm wrong, is to let the estate sit in a trust that isn't controlled by the heir(s) (spouse excluded).

Depends. Depends on what kind of trust you're talking about, principal purpose of the trust, who the trustee is, how often distributions are made from the trust, what type of assets are in the trust, etc. It's not that simple. There really is no easy answer to avoiding estate tax. Unless you want to give everything you own to charity when you die.

The best way to minimize estate taxes is to start planning with a good CPA/CFP or an AEP. Get your plan together very early on in life. Get a plan put together, follow the plan and re-evaluate every few years.

There are IRS regulations that look back to transactions that took place the three years preceeding the date of death, and pull back all assets the decedent gave away and put them back into the estate. Even if they were completed transactions. It's a nasty little code section.

[mhass]

Originally Posted by Farrah Whitworth-Rahn

There are IRS regulations that look back to transactions that took place the three years preceeding the date of death, and pull back all assets the decedent gave away and put them back into the estate. Even if they were completed transactions. It's a nasty little code section.

I had never heard that. Not that I worry a lot about estate planning at age 30. That's interesting.

It will be fun to see how the estate tax elimination in 2010? works out. Congress will know then if they can live without its revenue or if the increased inheritance amounts actually generate other tax revenue like dividend and cap gains or sales tax.

[Farrah Whitworth-Rahn]

Originally Posted by mhass

I had never heard that. Not that I worry a lot about estate planning at age 30. That's interesting.

It will be fun to see how the estate tax elimination in 2010? works out. Congress will know then if they can live without its revenue or if the increased inheritance amounts actually generate other tax revenue like dividend and cap gains or sales tax.

I'm actually pretty interested to see how the service is going to handle the death of John Walton (Wal-Mart heir). The Walton family has engaged in some pretty agressive estate planning, starting with Sam Walton. I'm going to be interested to see if some of their ideas stand up to the scrutinity the service is sure to give them.

[Farrah Whitworth-Rahn]

Dola - I'm also a tax nerd so I read these types of WSJ articles before I hit the sports page or the other parts of the paper.

[Solecismic]

Generally, the people who are hurt most by estate tax are those who refused to plan for it. Many small businessmen would be surprised to hear that their company has some value beyond the cash it generates.

The stereotypical "rich" person, the one who inherited everything and sits by the pool all day commenting (in an faux English accent) on "those lazy Negroes" or some such rot, is usually very well protected.

I'm all for reforming the tax code to ensure some sort of progressive but not oppressive rate for everyone. I'm just tired of rich asshats like Kerry, Gates and Edwards trying to fuel class warfare over this issue. The estate tax is fundamentally flawed.

[Galaxy]

Originally Posted by Farrah Whitworth-Rahn

I'm actually pretty interested to see how the service is going to handle the death of John Walton (Wal-Mart heir). The Walton family has engaged in some pretty agressive estate planning, starting with Sam Walton. I'm going to be interested to see if some of their ideas stand up to the scrutinity the service is sure to give them.

What are the ideas the Waltons have? Isn't one of the Walton offspring married to another billionaire?

[MrBigglesworth]

Originally Posted by mhass

The rate is high and the estate has been taxed already at least once or twice.

Actually, the estate tax was implemented because those things haven't been taxed yet at all (things like real estate appreciation and business worth).

[mhass]

Originally Posted by MrBigglesworth

Actually, the estate tax was implemented because those things haven't been taxed yet at all (things like real estate appreciation and business worth).

I don't know about that. Every cent that comes in here gets taxed.

[Galaxy]

Originally Posted by MrBigglesworth

Actually, the estate tax was implemented because those things haven't been taxed yet at all (things like real estate appreciation and business worth).

Aren't you taxed in terms of your corporate/business taxes on your revenue?

But you will have to pay taxes on the real estate when you sell it.

[Mr. Wednesday]

In return for paying the estate tax, you get to change your valuation basis to the present value. If the estate tax is wiped out, then the valuation basis should remain at where it was when it entered the possession of the deceased, or their predecessor. I could see that being a nightmare for property in a family for a long time.

[Farrah Whitworth-Rahn]

Originally Posted by Galaxy

What are the ideas the Waltons have? Isn't one of the Walton offspring married to another billionaire?

Don't know about marriages, but the Waltons have investment partnerships and family limited partnerships among some other things I wouldn't even know how to explain.

The service is aggressively attacking those types of entities, especialy FLP's as a method of evading the estate tax. In some districts the service has been successful.

[Galaxy]

So basically they are "hiding" money and assets? Or am I wrong?

[Farrah Whitworth-Rahn]

Originally Posted by Galaxy

So basically they are "hiding" money and assets? Or am I wrong?

Wrong. FLP's and IP's are complicated and similiar. They have sublte differences, but they are basically the same thing. This is a very very watered down explanation. FLP's and IP's are basically limited partnerships with all members of the family as partners. Each contribute their assets to the partnership, and the entity is managed in a centralized location often by a professional money manager who is not part of the family.

Partnerships are flow through entities, so any income generated on these investments is taxed to the individual partners on an annual basis. And the basis of assets contributed to the partnership is the same as it was when the individual owned them. When an asset is sold, tax is paid on the gain just like it would have been had the individual sold it. No income or appreciation of assets escapes taxation.

These are attractive because the patriarch of the family, who is usually the decedent, contribures the most assets to the FLP in exchange for the largest share of the FLP. He then uses his annual gift tax exclusion to transfer, tax free, portions of his interest in the FLP to other members of the family. It's a way to shift assets to younger generations without paying estate tax on them.

Hopefully the patriarch lives long enough to gift enough of his interest away so that he is no longer a majority, or even a significant owner in the FLP. Upon his death, the fact that there is an independent money manager and the decednet not being a majority owner will get a discount for lack of control of his interest. That discounts the amount included in his estate, and the amount that is taxed. That increases the assets transferred to the heirs.

Did I lose you?

[mhass]

It would take an awfully long time to gift away a Walton estate with the current gift exclusions. I'm betting that estate tax bill will be pretty hefty.

And no, thanks for the explanation.

[Samdari]

Originally Posted by Farrah Whitworth-Rahn

I've heard of IRS agents counting birthday gifts as "gifts" for this purpose.

Of course they do. Otherwise, people would be giving houses, luxury cars and major corporations as birthday gifts to escape paying taxes.

[Castlerock]

Originally Posted by Solecismic

Generally, the people who are hurt most by estate tax are those who refused to plan for it.

Or those who die suddenly and unexpectedly. You can have a very good plan but if you die 20 years before you expect to, then you are screwed.

[Peregrine]

if you die 20 years before you expect to, then you are screwed.

Isn't this true for pretty much anyone?

[Farrah Whitworth-Rahn]

Originally Posted by Samdari

Of course they do. Otherwise, people would be giving houses, luxury cars and major corporations as birthday gifts to escape paying taxes.

But a $75 CD box set? Seems to me that the agent on this audit was a little full of himself.

[Castlerock]

Originally Posted by Farrah Whitworth-Rahn

But a $75 CD box set? Seems to me that the agent on this audit was a little full of himself.

Isn't there a $10,000 per year allowance? Sounds like the $75 is part of a larger (set of) gift(s).

[Castlerock]

Originally Posted by Peregrine

Isn't this true for pretty much anyone?

Not sure I understand your point.

[Farrah Whitworth-Rahn]

Originally Posted by Castlerock

Isn't there a $10,000 per year allowance? Sounds like the $75 is part of a larger (set of) gift(s).

Currently the annual gift exclusion is $11,000 per person, per recipient.

In this particular case, the grandparents gifted $22,000 in cash to each of their grandchildren. Birthday gifts and christmas gifts were de minimus, in my opinion. No more than $250 in value for the entire year. The service attemtped to include those birthday and christmas gifts, as well as some other absurd items (like show tickets grandpa paid for when he took the grandkids to see a play, meals etc.) as "gifts" subject to gift taxation.

My point here is that this overly agressive agent was trying to tax things that grandparents do as part of being a grandparent. Why? Because this is a rich family and the agent thought he could squeeze as much as he wanted, and they wouldn't fight back.

[MrBigglesworth]

Originally Posted by Castlerock

Or those who die suddenly and unexpectedly. You can have a very good plan but if you die 20 years before you expect to, then you are screwed.

Individuals can leave to heirs tax-free $1.5 million in 2005 and eventually $3.5 million in 2009. That's a good chunk of change, and won't exactly leave a widow bankrupt.

[Marmel]

Originally Posted by Castlerock

Or those who die suddenly and unexpectedly. You can have a very good plan but if you die 20 years before you expect to, then you are screwed.

Your plan is not very good if you die 20 years before you expect to and become screwed. Life insurance, in a trust outside of the estate, is essential to any good estate tax plan, and I personally believe it is the most important part of the plan (if not the only one necessary).

[mhass]

Originally Posted by Marmel

Your plan is not very good if you die 20 years before you expect to and become screwed. Life insurance, in a trust outside of the estate, is essential to any good estate tax plan, and I personally believe it is the most important part of the plan (if not the only one necessary).

They have to say that stuff to live in Connecticut.

[Galaxy]

Now, when you gift someone, say you buy your mom a $20,000 car, do they have pay the income tax on that, or just the sales tax? What if you already paid the income tax?


What if you gave you parents a $1 million as a gift, would that be taxed as income tax (which would be at the 35% rate Fed income bracket)? After that, you are all paid?

[Farrah Whitworth-Rahn]

Originally Posted by Galaxy

Now, when you gift someone, say you buy your mom a $20,000 car, do they have pay the income tax on that, or just the sales tax? What if you already paid the income tax?


What if you gave you parents a $1 million as a gift, would that be taxed as income tax (which would be at the 35% rate Fed income bracket)? After that, you are all paid?

There is no income tax to the recipient on a gift. Gifts are made with after tax cash, so the income tax has already been paid.

If you (one person) gave your mom (one person) a $20,000 car, the giftor could be liable for gift tax on the amount that exceeds the annual gift tax exclusion.

If you and your wife (two people) gave your mom (one person) a $20,000 car, you and your wife can split the annual exclusion and there woudn't be any gift tax.

The same thing applies for cash gifts.

Note that a gift and a prize are different. For example those cars that Oprah gave away last year are not the same thing as a "gift" in this context.

[Galaxy]

And the "gift" exclusion is up to $11,000, correct? Is this per item? What is the rate of tax on the amount after?

[mhass]

$11,000 per year per giftor per giftee. After that it's ordinary income I presume.

[Galaxy]

Sorry if I keep asking, but I'm no tax geek.

Would the $11,000 not be counted then? So, if you have a $20,000 gift, your only taxed on the $9,000?

[mhass]

Right on.

[Farrah Whitworth-Rahn]

Galaxy don't confuse gift tax with income tax. They are two seperate tax systems.

The giftor pays income tax on all gifts made, no matter how large or small. For example, if I were to give you $15,000 cash - I don't get to deduct that from my income tax return. I pay tax on that amount at my marginal tax rate. That's why giftees don't pay income tax on gifts, it's already been paid.

Gift tax kicks in when the amount of the gift exceeds the annual gift exclusion, depending on a couple of other factors having to do with estate tax. I can give you $11,000 gift tax free, but the remaining $4,000 I could owe gift tax on if the other factors come in to play. These other factors are fairly complicated, and I think I might have mentioned them back on the first page of this thread. See this post.

Gift tax is in addition to income tax already paid on the gift by the giftor.

Make sense?

[albionmoonlight]

Looks like this will be back in the news in the next week or so.

http://www.forbes.com/home/businessi...07beltway.html

[Galaxy]

I've heard about this the other day. Sound be interesting. I would love to see an overhaul of our entire tax structure.

[clintl]

Originally Posted by mhass

I don't know about that. Every cent that comes in here gets taxed.

Capital gains never gets taxed until the asset is sold.

[Galaxy]

Originally Posted by clintl

Capital gains never gets taxed until the asset is sold.

Yeap.