Estate Tax Avoidance

There is a move afoot to repeal the estate tax since it is unfair to relatively small family farms. I guess when old MacDonald dies, the farm must be sold to pay the estate tax bill.

In order to keep this out of GD, I just want to know: Why is incorporation not an option? I know that Doctor’s incorporate all the time to avoid liabilities like this, why can’t farmers?

While there are a variety of ways to pass assets to the next generation or otherwise shield them from estate taxes, simple incorporation is not one of them.

The reason is that the tax is assessed on the value of the estate, which does not change simply by moving all of the assets and liabilities into a corporation. If something is worth $4MM, it’s worth $4MM. In fact, while farms are the most common small-but-taxable estates in political rhetoric, I believe that the tax actually falls more commonly on someone who has built a non-farm corporation (an auto parts store, for example) and wants to pass it on.

Well we could go on and on about the politics of the OP, but I won’t.

Most people can put assets into a trust, which, when designed properly (by an estate attorney), can pass just about anything (like a family farm) from one generation to another sans death tax. IIRC, the inheritors still pay income tax on their new-found “wealth,” unless it comes from a tax-exempt source (like a life insurance policy). It’s really not that hard to “evade” the estate tax, and I really think that this is a non-issue that is being used to fill time until Bush unveils his budget.

slap Dammit, I knew I couldn’t resist politics.

Oh yeh, regarding incorporation…

Incorporating changes the status of a business. Corporations can issue stock, etc. The reason that doctor’s incorporate is to avoid personal liability. If something ugly happens at work, and someone sues the Dr. for $900 million, they can’t touch any of the Dr’s. personal assets.

For this benefit, they pay higher taxes (the corporation pays taxes, and then the ‘profits’ are taxed as income).

sethdallob wrote:

My wife and I have an estate that would be hit with the estate tax if we were both to die. Because of this, we’ve researched the subject a fair amount. We’ve come to the conclusion that there’s no way to avoid it, except by trusting small amounts of money to family/friends each year. Of course, if we were to trust it to them, then it’s not ours anymore, and the reason we’re saving the money in the first place is for our sons’ college in 15+ years, and for our retirement.

So we’re trying to build enough to cover a comfortable retirement and to give our sons an education - we don’t want to give it away. But if we were to die before then, Uncle Sam would come in and confiscate a huge chunk of change, on money that we’ve already paid taxes on to begin with!

The esate tax is hard to evade, and it’s a very real issue for us.

I would normally email this, but since you have no mail link…

I would suggest that you consult with a financial advisor. There are lots of non-trust ways to spend down an estate without ‘giving’ your money away. I’d be more than happy to share them with you, but I’m only licensed to give such advice in the state of CA.

If you are significantly above the unified credit trust, then I suggest that you consult with an estate attorney. Financial advisors are a heck of a lot cheaper, and (in my very biased opinion) do a lot more than most people think.

I understand that incorporation does not change the value of the estate, but doesn’t it move all the assets into the corporation? After all, if the CEO of Ford dies, they select a new CEO, they do not break up Ford.

I guess what you are saying is that if MacDonald incorporates, and retains ownership of all the shares, then when he dies all the shares become part of the estate.

However, why not incorporate and distribute the shares among the family members? Then at least his share is diluted, and does not cause a big estate tax liability.