polksalet Posted August 9, 2008 Share Posted August 9, 2008 Anyway I was talking to an incredibly old client today who faces a lot of stress about the upcoming election and how much the gumment might get of the fortune he wishes to leave for his kids. My question is, why don't these old guys just sell their investments off when they turn 70-80 and buy some tangible commodity (gold, art, firearms, etc) and pass them down. Since I was raised uber poor white trash my family has never had to condier such and event. Quote Link to comment Share on other sites More sharing options...
yo mama Posted August 9, 2008 Share Posted August 9, 2008 (edited) Anyway I was talking to an incredibly old client today who faces a lot of stress about the upcoming election and how much the gumment might get of the fortune he wishes to leave for his kids. My question is, why don't these old guys just sell their investments off when they turn 70-80 and buy some tangible commodity (gold, art, firearms, etc) and pass them down. Since I was raised uber poor white trash my family has never had to condier such and event. Well, technically you need to report those types of tangible items on an estate tax return (assuming you have a taxable estate). The nature of your assets is largely irrelevant; its their value that matters. Now, perhaps what you're getting at is buying stuff that can be easily hidden; stuff that doesn't leave much of a paper trail. You can do that. But someone will have to sign that estate tax return, and they do so under penalty of perjury. Therefore, whoever got hired to prepare that return could never, ever know about the bars of gold, because it's unlikely they're going to risk their license - or jail time - to help you commit tax fraud. Plus, the IRS (assuming they audit the return) is pretty good and digging up old bank records and financial accounts. So if they see that money disappeared several years ago and don't see where it came back out a rabbit hole they'll get nasty and basically assume exactly what you've done and tee you up accordingly. You'd have to plan a decade or so in advance to really pull that off, and even then, what are your heirs going to do with a bar of gold? You can't exactly sell those at a swap meet and get fair market value in order to continuing staying off the gubmet's radar. Believe me, there are plenty of legit planning techniques that can reduce one's estate tax bill. I do quite a bit of that work for Silicon Valley types. If someone is willing to undertake the kind of risk and expense involved to hide assets like that, they're probably better off just contacting a good estate planning attorney to see what's on the menu, planning wise. FYI, the upcoming election will likely have zero impact on what happens with the estate tax. No one is pushing for full repeal anymore. It's just not going to happen. Edited August 9, 2008 by yo mama Quote Link to comment Share on other sites More sharing options...
nuke'em ttg Posted August 9, 2008 Share Posted August 9, 2008 so pissin away all your money is actually better for the kids...... Quote Link to comment Share on other sites More sharing options...
TheShiznit Posted August 9, 2008 Share Posted August 9, 2008 Anyway I was talking to an incredibly old client today who faces a lot of stress about the upcoming election and how much the gumment might get of the fortune he wishes to leave for his kids. My question is, why don't these old guys just sell their investments off when they turn 70-80 and buy some tangible commodity (gold, art, firearms, etc) and pass them down. Since I was raised uber poor white trash my family has never had to condier such and event. Consider that most peoples investments in the "estate Tax" level are non-qualified....and upon death pass with a stepped up cost basis. By liquidating their stock accounts, they incur all the gain and have to pay the income taxes on all gain...however, if they leave their Exxon stock(example) as is, the children receive the stepped up cost basis and if liquidated right away will have very little to no capital gain tax. Lots of options out there for people to pass on estates....they just need to quit complaining and take action. Quote Link to comment Share on other sites More sharing options...
Big Country Posted August 9, 2008 Share Posted August 9, 2008 He could start gifting the money now (limit is 12K to an individual in a year) and that money is passed on tax free. Quote Link to comment Share on other sites More sharing options...
muck Posted August 9, 2008 Share Posted August 9, 2008 He could start gifting the money now (limit is 12K to an individual in a year) and that money is passed on tax free. Right, and I actually think it's a bit more than $12k / yr here in 2008, but I could be wrong. So, if "grandpa" and "grandma" are both alive ... have three kids, each of whom is married ... and each of these three kids have two kids each ... then ... Grandpa gives $12k / yr to: Son His wife His two kids Son His wife His two kids Daughter Her husband Her two kids Total gift = $144,000 / yr Grandma gives $12k / yr to: Son His wife His two kids Son His wife His two kids Daughter Her husband Her two kids Total gift = $144,000 / yr Grandma and Grandpa moved $288,000 / yr out of their taxable estate to their kids and grandkids w/o the feds getting a penny. Quote Link to comment Share on other sites More sharing options...
dmarc117 Posted August 9, 2008 Share Posted August 9, 2008 http://www.smartmoney.com/estate/index.cfm?story=start Quote Link to comment Share on other sites More sharing options...
yo mama Posted August 11, 2008 Share Posted August 11, 2008 Right, and I actually think it's a bit more than $12k / yr here in 2008, but I could be wrong. So, if "grandpa" and "grandma" are both alive ... have three kids, each of whom is married ... and each of these three kids have two kids each ... then ... Grandpa gives $12k / yr to: Son His wife His two kids Son His wife His two kids Daughter Her husband Her two kids Total gift = $144,000 / yr Grandma gives $12k / yr to: Son His wife His two kids Son His wife His two kids Daughter Her husband Her two kids Total gift = $144,000 / yr Grandma and Grandpa moved $288,000 / yr out of their taxable estate to their kids and grandkids w/o the feds getting a penny. And this is the "slow" way. There are numerous planning options that allow you to turbo-charge the use of the taxpayers' "annual exclusion" from gift tax. (And yes, its $12k in 2008). Quote Link to comment Share on other sites More sharing options...
Atlanta Cracker Posted August 11, 2008 Share Posted August 11, 2008 And this is the "slow" way. There are numerous planning options that allow you to turbo-charge the use of the taxpayers' "annual exclusion" from gift tax. (And yes, its $12k in 2008). The easiest way to get the biggest estate tax bang for your buck is life insurance assuming they are relatively healthy. Life insurance proceeds when everything is setup properly incur no estate tax or income tax. Very important to have an attorney involved in the structure though. Quote Link to comment Share on other sites More sharing options...
yo mama Posted August 11, 2008 Share Posted August 11, 2008 (edited) The easiest way to get the biggest estate tax bang for your buck is life insurance assuming they are relatively healthy. Life insurance proceeds when everything is setup properly incur no estate tax or income tax. Very important to have an attorney involved in the structure though. Meh. Insurance has its place, especially for those with a fairly predictable estate tax liability. And there are certainly creative ways to maximize the efficiency of its use, but I find that it is often more efficient to merely shrink the size of the taxable estate through various wealth shifting/estate freeze techniques. If you shrink the size of the estate, you don't need as much insurance because the estate tax bill is lower. At the end of the day the cash stays within the family rather than getting paid out as insurance premiums. There are also a lot of creative ways to get estate tax charitable deductions, which also shrink the value of the estate, which is another alternative to "more insurance." For a liquid estate, a taxpayer with great cash flow, or a taxpayer who has a lot of real estate/farms/ranch types assets (and can thus defer estate taxes) lots of insurance doesn't make sense. Insurance is a more appropriate planning tool for taxpayers who have a big estate tax bill and little liquidity. Edited August 11, 2008 by yo mama Quote Link to comment Share on other sites More sharing options...
Atlanta Cracker Posted August 11, 2008 Share Posted August 11, 2008 Well, the obvious choice is to move things out of the estate within reason when possible. Once you've done as much of that as possible paying insurance premiums to avoid a 55% haircut makes sense. For a healthy couple you can also leverage what you have by purchasing insurance to create an even larger estate. A typical 2nd to die policy may cost $20,000/yr in premiums but have a death benefit of over $1,000,000 depending on age and health of course. So unless both spouses live 50+ years you dramatically increase the amount of assets passed on. I'm also not familiar with your reference to land/farm owners deferring estate taxes. Generally those are the folks that need insuance the most so that they have the liquidity to pay the estate tax if the value of the property is large enough. Anyway, life insurance is just one tool and it all comes down to what the person is trying to accomplish. With the limits where they are currently simply structuring your assets and wills to use both spouses credits takes care of most everyone I've run into. Quote Link to comment Share on other sites More sharing options...
yo mama Posted August 11, 2008 Share Posted August 11, 2008 Well, the obvious choice is to move things out of the estate within reason when possible. Once you've done as much of that as possible paying insurance premiums to avoid a 55% haircut makes sense. For a healthy couple you can also leverage what you have by purchasing insurance to create an even larger estate. A typical 2nd to die policy may cost $20,000/yr in premiums but have a death benefit of over $1,000,000 depending on age and health of course. So unless both spouses live 50+ years you dramatically increase the amount of assets passed on. I'm also not familiar with your reference to land/farm owners deferring estate taxes. Generally those are the folks that need insuance the most so that they have the liquidity to pay the estate tax if the value of the property is large enough. Anyway, life insurance is just one tool and it all comes down to what the person is trying to accomplish. With the limits where they are currently simply structuring your assets and wills to use both spouses credits takes care of most everyone I've run into. 55% haircut? The maximum federal estate tax rate is currently 45%. Yeah, IRC 6166 gives up to a 10 year repayment option. 14 years if the estate contains a closely held business. I've got mixed feelings on insurance. It's always an option, makes sense for some folks more than others, but if I can utilize the money the would have otherwise gone to premiums as part of cash flow engine to fund the sale of assets within the family, during the taxpayer's lifetime (most often to a trust or other entity created for the benefit of the taxpayer's intended heirs), I'll do that. (Especially if the sale is to a grantor trust, so as to avoid any present income tax liabilities in connection with the sale). The taxpayer can also elect to leave variable amount of assets at their death to either their own private foundation, or a charitable lead trust, which will similarly remove the assets from the taxable estate. Insurance is great tool mop up any remaining liability, or to provide liquid assets for use in trust/estate administration so that some heirs can get cash if others want particular assets. The primary benefit of insurance is that it can be held in an irrevocable life insurance trust ("ILIT"), the assets of which are excluded from the taxable estate, but the terms and conditions of which are established during the taxpayer's lifetime. So heirs don't necessarily get a sack full of cash; the ILIT basically gives the taxpayer a means to control the disposition of the insurance proceeds "from the grave," assuming the proceeds aren't all needed to pay taxes. Quote Link to comment Share on other sites More sharing options...
Atlanta Cracker Posted August 11, 2008 Share Posted August 11, 2008 The primary benefit of insurance is that it can be held in an irrevocable life insurance trust ("ILIT"), the assets of which are excluded from the taxable estate, but the terms and conditions of which are established during the taxpayer's lifetime. So heirs don't necessarily get a sack full of cash; the ILIT basically gives the taxpayer a means to control the disposition of the insurance proceeds "from the grave," assuming the proceeds aren't all needed to pay taxes. You could also gift $12,000/year to each child/grandchild and let them buy a policy on you but they are the owner. Then they get whatever death benefit tax free. Of course there is no control from the grave that way either and that would limit your ability to fund other transfer strategies like you discussed. I definatley don't think using insurance makes sense for most people but a lot of people view "premium" incorrectly when it could save 45% (my bad) even if there is no death benefit above and beyond what premiums were paid. Quote Link to comment Share on other sites More sharing options...
yo mama Posted August 11, 2008 Share Posted August 11, 2008 You could also gift $12,000/year to each child/grandchild and let them buy a policy on you but they are the owner. Then they get whatever death benefit tax free. Of course there is no control from the grave that way either and that would limit your ability to fund other transfer strategies like you discussed. I definatley don't think using insurance makes sense for most people but a lot of people view "premium" incorrectly when it could save 45% (my bad) even if there is no death benefit above and beyond what premiums were paid. The down side to gifting the money directly to the heirs is that the insurance then become incredible in *their* taxable estate if they are the ones purchasing the life insurance (which isn't a big deal if those heirs don't have a taxable estate to begin with). Put those annual exclusion gifts into an ILIT and it isn't taxed an anyone's estate. Ever. Plus, if you make grandchildren contingent beneficiaries of the ILIT then you can transfer $12,000 per child *and* grandchild (called a Cristofani Trust), which increases the amount available to pay premiums. But I've also crafted plans where the gifts go directly to the heirs, the heirs contribute the cash to a limited liability company, and the LLC purchases the insurance. That's a method I'll use when the heirs - not the insured - want to control how the cash gets spent and how the insurance proceeds become used after the insured dies. It's especially useful when the surviving heirs are contemplating purchasing a family business from the decedent's estate (which then has cash to pay estate tax) and the family wants a smooth transition post-death (no gaps in liability protection, management structure is already worked out in advance, transfer restrictions are in place, etc). Quote Link to comment Share on other sites More sharing options...
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