Estate tax planning

[Bluesplayer]

During a period of unemployment back in the 80's, I got a license and started selling life insurance for a major company. believe me, it wasn't great....

One thing I did learn, however, was that every salesman wanted to sell a big life insurance policy to a rich guy. The way it worked was like this - a guy with an estate valued at $10 million would buy a $5 million dollar policy with his heirs as the tax-free beneficiaries. The heirs would then use the proceeds of the insurance to cover any estate tax liability they might have. The premiums were high, of course, for that amount of coverage, but not when compared to the tax savings. And besides, "expensive" is a relative term.

My point is this: anyone savvy enough to put together an estate large enough to qualify for an estate tax liability is smart enough to make sure it's covered, either with insurance, or some other financial mechanism. No one today is going to lose a net cent due to inheritance. The whole issue is a red herring.

[rfranklin]

1. Yes, they keep talking about family farms...

But they cannot produce anyone who has lost a family farm due to the "death tax."

[Kali]

3. Posted at the same time

we came very close to losing part when my Grandmother died in the mid-70's. Some may have the option to sell a chunk and therefore not lose the whole thing at once, but that is a dangerous road to go down - it can signal the beggining of the end. "Oh its just an acre and that will be it" Like a first drink for an alky, actual cash can be a total rush for people used to doing with nothing. Slippery slope.

[Kali]

2. Land

Family farms and ranches can be at serious risk due to inheritance taxes. Open space is not yet valued enough by society to help defray the insane cost of land for agriculture.

Sitting on literally at least a million dollars worth of land but can barely afford gas. The only way to actually "see" the value of that land is to sell to developers. Ain't gonna happen if I can still breathe, but when it's my turn, taxes could jeopardize things....

[Bluesplayer]

9. I thought the dems

proposed no tax on any estate under $10 million.

[Geoff R. Casavant]

13. There have been a lot of proposals

but for the time being the exemption will go between $2-3 million for a couple of years, and eventually go down to $1 million.

[OneTwentyoNine]

16. If kept in the family the farm has ZERO inheritance taxes....

If not a couple can receive as much as FOUR million tax free in 06,then you'd only pay tax on the amount over four million.

Losing the family farm to the tax man is 100% pure Republican BULLSHIT. Its yet to EVER happen. Family farms are lost to the bungling of this administration and others who don't create markets and destroy economy's.

[Eric J in MN]

4. Billions is collected from the Estate Tax.

It's not a red herring.

[Geoff R. Casavant]

5. Hoo-boy!

I do estate planning and am spotting a few things that need correcting in theoriginal post and some of the replies.

As for the original post, it appears no one took into account that, according to the description, the insurance proceeds would themselves be subject to the estate tax. In the '80s, someone with a $10M estate would expect to pay about $4M in estate taxes, and anything after that would be taxed at about a 50% marginal rate, so a $4M policy would generate an additional $2M in estate tax. In order to make sure the estate tax liability was entirely covered by the insurance proceeds, you would need a policy almost as much as the rest of the estate.

As for the reply regarding having wealth tied up in land, there is a specific exemption if the land is used for farming or business purposes to pay the tax in installments over about ten years, so the land does not have to be sold right away.

[category5]

6. It is wrong to tax an estate which amounts to what a middle class

person can save during his/her lifetime by living a frugal
life and investing the money, so that his/her children can benefit
from the parents hard work and frugality.

In current dollars that dollar amount is aprox 2 million. I would
even go 3 million. Anything over that should have to pay death tax.

[Blue Topaz]

7. Yes

I think it is entirely reasonable to exempt the first 2-3 million dollars from any estate tax.

[Geoff R. Casavant]

14. Well, it's a trade off

A lot of a person's estate consists of unrealized capital gains that have not yet been taxed like they would when an asset is sold. When a person dies, the capital gain basis of the property "steps up" to its value as of the date of death, so those pre-death capital gains are never taxed.

[category5]

18. I think you missed the gist of my point

Without getting into the nitty gritty of how estate tax is
computed, my main point is............FIRST 2.5 million shoulf
be death tax exempt regardless of how the taxing rules are set up.
If the unrealized capital gains form a portion of that 2.5
million, then so be it.

And this tax exemption MUST BE INDEXED FOR INFLATION!!!
Otherwise the tax bracket creep takes its insidious toll.

[Kali]

8. I don't believe that was in effect in the mid-70's

and frankly having ten years to come up with what you can't come up with immediatly isn't such a break. The end result (breakup of landholding) is likely to be the same.

[Geoff R. Casavant]

12. I have to admit

I have not yet seen that particular provision come into play in the estates I have handled, and you are correct that it is a fairly recent addition to the tax laws. I wasn't suggesting that your grandmother should have used it, but rather that there are strategies in place now to prevent it from happening again.

[Bluesplayer]

10. question

Why would the estate be liable for extra tax because of the proceeds of the life insurance policy? The individual beneficiaries of the policy are the recipients/owners of that money, and they hold it tax free, at least until they grow old and it becomes part of their own estates.

Thanks!

[Geoff R. Casavant]

15. It depends

on whether the decedent retained any "incidents of ownership" over the policy, the most common of which is the power to select the beneficiary of the policy. There are strategies to get around this, perfectly legal and accepted by the IRS, but you have to plan ahead.

My best guess is it's designed to prevent people from selling everything and investing in life insurance when the end gets close.

[Bluesplayer]

17. hmm

the problem with that is that by the time the end is near, the premiums would be prohibitive, even for the uber-loaded.

[Yupster]

19. You wouldn't use term insurance for that

use.

You'd want a Universal or Whole Life policy where the premium stays the same throughout your lifetime. It starts high and stays that way. Insurance agents love them much more than cheap old term policies, but term policies would get too expensive to keep past a certain age so you'd have to use permanent insurance.

[Bernardo de La Paz]

11. Don't forget the Birth Tax that EVERY new American has hanging over them.

Every newborn American has something $100,000 in national debt hanging over them. This tax was ALL incurred during Republican administrations.