My Take
(a/k/a what I think is important)
Chapters 1 & 2
While
the chapters immediately go off on talking about estate planning, a few
fundamentals are necessary:
First
and foremost, recall the Estate and Gift tax is a concept based on the
accumulation of PROPERTY,
not
income generated FROM the property or services/labor. I will repeat this over and over, because I
admit even I had a hard time splitting the two because I was so used to just
thinking of taxation from an INCOME point of view.
Thus,
while we are generally used to understanding how taxes work on the income we
got from our job via a W-2 or our interest from a 1099, we might get confused
about this relatively new approach.
As
you read the first few pages, you will note that the text talks about the
unified credit (or at least what it used to be).
As
you can see, the unified credit rose from $675,000 to $1 million (2002-3), and
then it no longer is unified (more on that later), as the estate tax exemption
increases for 2004-5 to $1.5 and 2006-8 $2million, 2009 $3.5 million, and $NO
TAX in 2010, and dropping back to $1 million in 2011 (the infamous fall back).
Notice
the gift tax credit caps at $1 million and doesn’t go away ever,
although it is massaged a bit in 2010.
So,
just what’s the deal in all of this stuff? What’s the common denominator? Obviously, what is driving these amounts are the property VALUES
at the time of death (or perhaps 6 months later- the alternative valuation) or
at time of gifting.
And
here the text really doesn’t really emphasize a huge
issue:
****IMPORTANT*** This property is STEPPED UP in value to the market value at the time of death (or
maybe 6 months later). ***IMPORTANT***
Whatdaya
mean? Example: say I bought 1,000 shares of Microsoft in
1977 at $1 a share when I was young, foolish and barely married (I wish!). After all the splits and current market
prices, despite the downturn, I have (say as an example) stock worth $2.2
million, despite the fact I only paid $1000 for it. Fate has it I die from a heart attack when I
hear Bill say he is going to pay a cash dividend.
Result:
My beneficiaries “take” the stock at its then market value as of the date of my
death, or $ 2.2 million. ( Of course, we still have to
discuss community property, but go with the flow for now). Thus, the Step up.
Thus,
now you see how important VALUATION is.
This was a simple case of being able to identify commonly traded stock.
It isn’t as easy, such as valuation of a business, land, or even a home in some
cases.
Notice this applies to everything I “owned” at the time of my death. And thus this also requires us to understand
certain property concepts – in other words, what did I actually own??? (discussed shortly).
Notice
also it does two things:
My
estate
now has a value (assuming nothing else was in it) of $2.2 million less my
wife’s ½ community property interest, or 1.1 million. In other words, it now
has a new basis!
Forgetting
about estate taxes, notice that my family now has a new basis of $2.2
million in the total stock (not just my estate’s share), not $1,000.
From
an income tax perspective, if the family chooses to sell the stock, there is a
huge savings. But, I also might have to
pay more in estate taxes, wouldn’t I?
$2.2 million total versus $1,000 is a huge difference.
Ok,
I digressed, so now back to discussion:
I
mentioned a “unified”
credit earlier. The idea, in simplier (and still today) times, was that we had a
choice. Recall today
we have $1 million exclusion/person.
This applies to our transfer of property to someone during our lifetime
(gifting) or death (estate taxation).
Thus,
we have a choice: we can use it up during our lifetime, gifting
to our children or whomever without paying any tax (or them paying any tax,
other than income taxes derived from the income generated by the property) up
to $1million OR we keep it in the bank till we die, and then our beneficiaries
will get up to $1million without having to pay estate taxes OR we can do both:
gift during our lifetime (keeping up with how much we have gifted) and then our
beneficiaries use what is left of our $1million (assuming we died in 2003).
So,
say I gave away $400,000 last year, filed a gift tax return. No tax would be
due. I die this year, 2003. $600,000 would be available for my estate tax
return.
Thus,
$400K (gift) + $600K (estate) = $ 1 million
ergo “unified” credit
Geez,
let’s get back to the text a moment:
Notice
the so called maximum
rates of taxation: 49% for 2003. Of course, this rate isn’t based on
the total amount of property, you have to fill out a tax return, and in general
the taxes are similar to the income taxes in that the effective rate increases
the more you have.
In
other words, in my example above, my estate wouldn’t be paying 49% on $2.2
million. There are a few tricks to avoid
all of that, which we will talk about later and other chapters.
The
text notes that in addition to federal taxes, there is generally a state tax as
well. Don’t get smug, thinking
The
text then casually mentions the “marital deduction.”
So,
what is it and why do we care.
Generally, here is the rule: UNLESS OPTED TO THE CONTRARY, there is no
requirement for the survivor to pay any estate taxes. In general, the provision (the Marital deduction) was enacted to prevent from impoverishing
a surviving spouse in the early days of estate taxation, and has continued all
these many years, despite the size of the estate.)
Thus,
if Bill Gates were to pass away today, absolutely no tax would be due on his
estate until his wife passed away.
NOTICE: it is a DEFERRAL, not a forgiveness of the tax.
Bottom line: except in unusual
situations, no matter what type of will the decedent had, there will be no tax
on the first to die unless so opted. The
trick is to minimize the tax on the SECOND to die.
BUT Notice that the survivor may add to their overall assets,
possibly causing a huge estate tax bill when it is all said and done without
proper planning!
The
text also does its obligatory mention of costs of probate, estate
administration and the like. And
unfortunately, it is true.
I
have seen numerous estates gouged
by expensive lawyers and the like playing this game, even in
The
text appropriately mentioned that the estate can run into serious problems if
it is illiquid and “fire sales” of assets have to be made. See how property VALUES and attendant issues
permeate all of this??
Say
you have a $10 million dollar piece of real estate but no cash to pay various
expenses, and you have to sell it as a fire sale for say $ 2 million. Obviously, it could hurt BADLY!
Page
10 gives a very useful overview of things that have to be considered in estate
planning, as well as estate/gift taxation.
As you will see, often we interchangeably talk about estate planning as
if it were a discussion of estate/gift taxation.
Also, take the time on Page 10 to read
and REMEMBER one of my favorite quotes/citations from Judge Learned Hand about
taxation. His words say it all, and you
should always remember them.
So,
what about all the uncertainty about estate and gift taxes? It just means we
have to keep up with what is going on, and to try to “plan” for these
consequences. It is really no different
than rolling with the flow as the INCOME taxes change. It is just that generally we only do one (or
two, in a marriage) estate tax returns (if the estate is large enough).
The
text talks about getting the proper information to prepare for planning. Obviously, the same goes for PREPARING the returns, it is extremely similar. Recall again, we are dealing
with PROPERTY values, some easier to identify, others not!
Ah,
the infamous questionnaire!
It
is a real trick/skill to get the information out of your client. And they have to trust you, as you might
expect. And often one has to imagine the worse, such as simultaneous death,
remarriage/divorce, “tough love” for kids, etc. But, I submit to you, if you
actually gave your client the list to have them fill it out that is in the
book, unless they had a CPA, you won’t get it back and probably will not see
the client again. There are easier questionnaires, I assure you. Would you fill all of that out??? Talk about
a turn off.
Understand,
I am not questioning the need for the data! You have to know the full impact of
your client’s financial position/condition.
It just might have to be obtained
by other means or incrementally.
Don’t
get hung up on the QTIP stuff at this time, more on that later.