Hypothetically Avoiding the Estate Tax

[Quartz]

At least in the U.K., all Mister Richie McRichguy has to do is survive 7 years after the gift.

@Little Nemo

You’re going to die and your biggest concern is your tax situation? … It’s ahead of how your death will affect your family?

Arranging your affairs should be high on your list of concerns if you love those who will inherit. My family is still dealing with the aftermath of my aunt’s death. She made no IHT / estate tax planning and it’s caused us immense trouble. (IHT kicks in at a much lower amount over here.)

[Jonathan_Chance]

Mr Rich would simply have to set up a trust, frankly. Assets go into the trust and can be earmarked ‘For the benefit of Mr. Heir’. Mr. Heir never actually HAS the money…he just has the use of the money held in a non-profit.

[Little_Nemo]

@Quartz

Arranging your affairs should be high on your list of concerns if you love those who will inherit.

High on the list, sure. But it shouldn’t be the most important item on your list.

[Tom_Tildrum]

@Martin_Hyde

I don’t know the specifics but you can set up an irrevocable trust, with your heirs as the beneficiaries and avoid having to go into probate or paying estate tax. For a large estate, avoiding probate is a big deal as it can be up to 5% of the estate assets.

Now, an irrevocable trust isn’t a tax free vehicle, the trust itself has to pay income taxes for example. Further, if you just start gifting funds into a trust that exposes you to the same problems you might have if you were trying to avoid the estate tax by gifting funds to your relatives prior to death (basically you’d run into the gift tax.)

Further, money received from the trust beneficiaries will be considered some form of income to the beneficiary. But you can definitely use an irrevocable trust to avoid paying the high 55% estate tax rate but instead have your heirs only pay a relatively modest top marginal income tax rate on income received from the trust.

It’s technically true that an irrevocable trust avoids the estate tax, but it’s a wholly unsatisfactory tax-planning solution. The funding of an irrevocable trust is instead immediately subject to the gift tax, which operates on basically identical terms to the estate tax. So the rich person has not avoided the 55% tax rate – he’s accelerated it.

[dracoi]

@Tom_Tildrum

It’s technically true that an irrevocable trust avoids the estate tax, but it’s a wholly unsatisfactory tax-planning solution. The funding of an irrevocable trust is instead immediately subject to the gift tax, which operates on basically identical terms to the estate tax. So the rich person has not avoided the 55% tax rate – he’s accelerated it.

Unsatisfactory is a relative term.

Let’s say Mr. Rich Guy founded a giant software company and most of his assets are in stock. He could have put $10 million of that stock in a trust in 1980. The stock would now be worth $10 billion, but any gift tax would have been paid on the smaller value. So, yeah, he pays $5 million in tax now… but he saves $495 million in the long run.

When you’re trying to deal with billions of dollars, it’s the only feasible option. Even if $1 billion was earning a measly 1%, you’d need 770 gift recipients (at $13,000 each annually) just to give away the earnings. (And yes, if you’re married, you could cut that in half, to just 385 recipients.) If you have multiple billions or if you investments are properly managed to return multiple percent… well, that would take a really big family.

[Tom_Tildrum]

@dracoi

Unsatisfactory is a relative term.

Let’s say Mr. Rich Guy founded a giant software company and most of his assets are in stock. He could have put $10 million of that stock in a trust in 1980. The stock would now be worth $10 billion, but any gift tax would have been paid on the smaller value. So, yeah, he pays $5 million in tax now… but he saves $495 million in the long run.

You’re looking at it with the benefit of hindsight, however. If the company fails and the stock becomes worthless, he’s paid $5 million up front for nothing. I take your point, though; some people might take that gamble.

And I mainly just wanted to get across the fact that creating an irrevocable trust avoids the estate tax only in a very technical sense.

[Dahu]

This thread got me thinking about something a friend of mine brought up once.

Here in the UK there is no income tax on gambling winnings. He says it used to be common for wealthy elderly parents to play cards badly against their children, bet the estate, and lose. Thereby avoiding inheritance tax (as we call it). Not really sure if this really happened though.

[antonio107]

Just buy a large castle, and leave it to your heirs in Fee Tail. That’ll probably work! :rolleyes:

IANALY.