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Posted by on Jun 16, 2012 in Inventory, Thinking of Selling? | 22 comments | Print Print

Death-Tax Inventory?

For the elderly who have assets in the $1,000,000 to $5,000,000 million range, you should consider selling your house before the end of this year.

The death tax (a.k.a., the federal estate tax) is a tax applied to the transfer of a person’s assets at death. It is defined by the Internal Revenue Service as “a tax on your right to transfer property at your death.”

Under current law, the tax is temporarily set at the rate of 35 percent with an exemption of $5 million. On January 1, 2013 the estate tax is set to return at a top marginal rate of 55 percent (with an additional 5% surtax for certain estates) on all assets above a $1 million exemption amount.

Everything a person has of any value counts towards the death tax exemption.  This means your car, home, stocks, bonds, bank accounts all are totaled together to calculate if you owe the estate tax.  Starting January 1, 2013, under current law, if your total estate is over $1 million, you will owe taxes at a 55% rate. Think about all the assets you own:

  • personal property (such as a home, cars, furniture, artwork)
  • business assets (property, machinery and inventory)
  • investments (stocks, bonds and real estate)

Now think about how much that is worth – these days, it doesn’t take much to push you over the $1 dollar exemption, after which all additional assets are taxed at a 55% rate.  It is easy to see why nearly 70% of voters want the death tax repealed permanently. The estate tax doesn’t just affect millionaires and billionaires, it affects everyday people and America’s main job creating engine – family businesses.

For any assets valued over the exemption, the people who inherit the farm, business, or property will owe the tax within nine months of the decedent’s death.  For those family businesses that are forced to take out a loan to keep the business running, their tax rate becomes the tax paid, plus the interest owed on the loan.

http://www.irs.gov/businesses/small/article/0,,id=164871,00.html

 

22 Comments

  1. Not gonna happen. Mitt wins and cuts the death tax.

  2. The cash from selling the house is taxable, although cash is not listed as an asset. Selling does not avoid the estate tax.

    Bottom line, estate taxes are a nightmare and require a lot of effort to avoid. If you have a large estate, get the advice of a COMPETENT estate planning attorney.

  3. It’s an election year.

    The panderers – whores will come to the rescue on this unless a full dictatorship is declared before then.

    Bribes & Payoffs always work, er, I mean ‘Campaign Contributions’. . .

    The fat is in the fire.

    Hail Victory ! Hail Victory !

  4. Irrevocable Trusts will protect everything.

    That’s what the money has already been doing. That’s how the Goldmans got jacked twice by OJ.

  5. Actually irrevocable trusts do not stop the estate tax, neither do the payable on death accounts, in fact the executor can claw back the amounts to pay any death tax. Of course there is one way to handle this give to charity, in particular 401k assets are ideal since they both pay estate tax, plus income in respect of decedent taxes meaning they would take a 70%+ haircut in that situation.

  6. Put your assets in gold coins and pass them down off the books.

  7. How would selling your house avoid the estate tax? Seems like you would pay capital gains tax on the house when you sell it (if there are any) and then pay estate tax on the cash when you die.
    Don’t worry though, the one thing that the two parties can agree on is unfunded tax cuts! I’d bet that the estate tax cut will get extended.

  8. Bull-S@#)(*. The cash is also taxed at the estate tax rate. So selling now doesn’t help at all, unless you want to spend the money before your kids get it…

    And 55% on the part ABOVE $1M is actually pretty hard, even today, to reach. It does affect some, but the percentage is not that great. My grandparents reached it, but to be honest, the estate tax is not a “death Tax”, but a “Paris Hilton Tax”.

    If you have a $1.25M estate, which means an expensive home owned free-and-clear, the estate tax is, ohh, $125K, or, well, 10%.

    As for small businesses and farms, the estate tax can be paid over more than a decade, with the IRS charging a pittance of interest on the first million or so of the estate tax…

  9. Actually, selling now HURTS. You pay the capital gains tax, and then whats left gets hit by the estate tax.

    You wait till you die, the kids just pay the estate tax. So selling makes things WORSE, not better.

  10. If you sell your house, you can then give away the proceeds to your heirs tax free at a rate of $13,000 per year per heir while you’re still alive. Of course, you might have other assets besides your house, so you might be able to use this gift strategy without selling your house.

    I’m not sure how the “end of this year” deadline applies to selling your house. Estate tax would depend on when you die, not when you sell your house. (Selling it this year gives you one more year to gift the proceeds, of course, but this year is not unique in that regard.)

  11. Just got back, thanks for discussing.

    I just said to consider selling.

    I heard of a situation where a guy talked to a number of experts, and they determined that it would be better to sell this year.

    The property is worth $3,000,000-$4,000,000, and the father is elderly.

    Their big concern was the tax payment within 9 months after his death. They are worried that it would force them to cheap-sell the property just to pay the tax.

    It is a number of acres that deserve to be developed, and builders have proposed paying $4 million-plus after 2-4 years of getting it mapped.

    If you have to hurry up and sell undeveloped land, you might only get half as much.

  12. The amount you can “gift” an heir is more $$ now than it will be after Jan. 1st. So if your elderly and want to help your heir buy a home, it’s better to do it before Jan.1st when you have more cash to work with. The rules change Jan. 1st.

    The amount you can “gift” will change. It is possible to make a ONE TIME LIFETIME gift up to a certain dollar amount (can be hundreds of thousands) ONCE before you die.

    This is different than the $13,000 per year gift thing. I am referring to a ONE TIME LIFETIME gift generally used as a method to give an heir their inheritance early instead of waiting until death. Ask your accountant, after Jan. 1st that dollar amount becomes much lower.

  13. JTR: Even so, that may not help…

    Scenario 1: Dad dies before the change. Selling now caused an extra 15% hit for captial gains

    Scenario 2: Dad dies after the change. Selling now caused an extra 15% hit for capital gains. Selling later only loses more than 15% if the sale in a hurry causes such a hit, but if thats the case, why not just mortgage the property at 50% for a more graceful sale?

    One of the great things about the estate tax (great from the “Avoiding taxes” viewpoint) is you DON’T have to pay all that accumulated capital gains!

  14. Not just an extra 15% cap gains.

    Add California’s 9.5% and if Jerry Brown gets his retroactive tax increase passed, 13.3%.

  15. Could the inheritance tax be avoided by signing on an heir as co-owner of a property or multiple properties while the owner is still alive?
    Seems that could reduce the net worth of the property owner, helping to get them under the $1 million mark.

  16. WC Varones,

    “off the books” or not, even if they’re in gold coins, that is tax evasion. People pay taxes and penalties, and/or go to jail for that.

    Taxes are the price we pay to live in a civilized society.
    -the Great Dissenter

  17. Chuck,

    Yeah, bad joke.

    But there are a lot of legal ways to avoid the 55% confiscation: 529 plans, family partnerships, etc.

    Anyone with an estate over a million should be planning for this well in advance of dying.

  18. This isn’t sound advice all around.

    First, remember that if you are married and where you live, half your house may already belong to your spouse. Ditto half your bank accounts, assets, etc.

    Second, as others have alluded to: this can largely be done away with as an issue with proper estate planning. Perhaps your house or houses should be owned by your trust, not you.

    And, Third, this change is happening. No way Mitt wins and no way Obama cares about Mitt’s buddies having to pay some more in taxes.

  19. If Obama is re-elected, we’ve got much bigger problems to worry about than the death tax.

  20. Yeah, this has all kinds of stuff wrong with it, Jim.

    First off, the first $1 million is exempt. That means that if your estate is valued at $1,000,001, you will pay the marginal tax on $1; the other million is untouched.

    Further, the estate tax rate is a graduated marginal rate, just like income taxes. The actual rate you pay as a percentage of your total estate value is far lower than the “bracket” you’re in.

    Finally, if you have assets in excess of $1 million, you should be planning for this. Consult with a tax and estate advisor. Don’t leave a mess for your heirs to clean up.

    BTW, who fed you this 55% rate? The instructions for Form 706 only go as high as 35%: http://www.irs.gov/pub/irs-pdf/i706.pdf Are you including state tax obligations as well?

  21. BTW, who fed you this 55% rate? The instructions for Form 706 only go as high as 35% [ ... ]

    Ah, never mind, my bad. You were speaking of future tax rates, not current ones.

    Still, 55% will be a top marginal rate. Does anyone have the tax tables from 2000 that show what the estate tax brackets were?

  22. I’m not a tax advisor or attorney, yes everyone should get proper counseling for their specific case.

    I thought the nine months was harsh, and worth bringing up. Not much time for mourning the deceased if you need to scramble to pay the dough.

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