Estate Tax Changes

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sonowwhat?
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Estate Tax Changes

Post by sonowwhat? »

Our families Net Worth is approximately $6 million, I am retired, 49 years old, married with three kids (19, 16, 15). The majority (80%) of the net worth is in stocks and bonds and the rest real estate (Home and one rental) and IRAs. Most of our net worth is held in a family limited liability company for estate tax purposes only. The reasoning behind this was that for estate tax planning purposes, a family limited liability company's value lies primarily in its ability to reduce the size of our estate by way of "valuation discounts." A piece of property or an asset, generally, will experience a reduction in its fair market value, a valuation discount, when encumbrances are placed upon it. Thus I estimate that this technique reduces the value of my estate by about 1.2 million (25% of the value held within the LLC). This still leaves an estate value of $4.8 million.

So the big question that I have is that given that the current $5 million ($10 million for married couples)is going post fiscal cliff to $1 million ($2 million married) and rates going from 35% to 55% then what should I do and when.

1) Should we give the whole lot to the kids in some sort of grantor trust and become broke???? It seems to me like this is the only choice to avoid estate taxes if the new laws kick in. Can’t even give all but $2 million as I understand it as they will consider prior gifts in applying the unified credit to the upcoming $1 million threshold.
2) Should we do nothing. More than likely, Congress will reestablish a reasonable unified credit that will hand an estate value of $4.8 million for married couples. Hope they get something done and hope I dont die in the interim.
3) Go see an estate tax attorney. Well obviously this is what I expect most to say, but quite frankly, I would rather here some ideas or suggestions prior to going and visiting them.
Grt2bOutdoors
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Re: Estate Tax Changes

Post by Grt2bOutdoors »

With 4 weeks to go before expected changes, I would not waste anytime in going to see an estate tax attorney, if you could get an appointment. I'd expect their phones have been ringing off the hook.
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Topic Author
sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

Problem is if gifting is the answer, you have to do it before year end. Hmmmm what to do.
chaz
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Re: Estate Tax Changes

Post by chaz »

Don't go broke - keep 2 million.
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Topic Author
sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

Agree with not going broke but just looking avoiding giving it away in taxes going broke may be the best answer (55% tax rate on $2 million is a lot of money!)
Grt2bOutdoors
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Re: Estate Tax Changes

Post by Grt2bOutdoors »

sonowwhat? wrote:Agree with not going broke but just looking avoiding giving it away in taxes going broke may be the best answer (55% tax rate on $2 million is a lot of money!)
You want a better answer - SPEND IT!!! No one says you can't spend your own money on what you want, when you want. This is the beauty of living in this country (no VAT), appreciate it!
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chaz
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Re: Estate Tax Changes

Post by chaz »

sonowwhat? wrote:Agree with not going broke but just looking avoiding giving it away in taxes going broke may be the best answer (55% tax rate on $2 million is a lot of money!)
$2 million per couple will be tax free.
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Topic Author
sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

If I gift say $3 mil and keep $2 mil then when I die the whole $2 mil will be taxed. They will look back and see that I used up to and in this case over the $2 mil when I gifted the $3 mil in 2012. That is I essentially used up the entire credit this year so unless I gift the whole thing now while the unified credit is $10 million there is no way to avoid the 55% rate unless Congress gets there act together.
Grt2bOutdoors
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Re: Estate Tax Changes

Post by Grt2bOutdoors »

This is not meant to be snarky, however unless you know you are going to leave this planet shortly, why are you thinking about it? Enjoy your life including time spent with those you care about most and spend it now. You are 49, not 85 (no disrespect intended to those forum members who are, but you get the point). You are fortunate than most and may i recommend Charles Dickens "A Christmas Carol" to drive it home.
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MathWizard
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Re: Estate Tax Changes

Post by MathWizard »

Tax laws can change, and probably will, so I'll only address 2012, and assume no tax law changes.
It is not appropriate to discuss proposed legislation on this forum.

There is an gift tax exemption that is indexed to inflation.

Current tax law allows $13K per person annual gift tax exemption for 2012.
You have 3 children and given their ages, they probably are not married.

Assuming you want to gift them each the max, you could gift $13K and your wife could
gift $13K to each child. That is $26K times 3, which is $78K per year.
You can use the annual exemption each year and it does not count against your
estate tax exemption.

Once they get married, you could gift also to each spouse $78K per year for a total
of $52K per married couple, which is $156K per couple or close to $1MM in a little over 6 years.
The annual limit goes up, and is scheduled to rise from $13K to $14K for 2013.


Personally, I would not do this until they are of age. I explicity put a trust in my will to
avoid having a 18yr old with a large amount of free cash, as I believe it does harm, and
I don't want that for my kids. They can't get a big pile of money until they are 25.

I'd suggest instead spending that $26K and more by paying for good schooling to allow
them to earn their own money. Send them to the best school they can get into, that is
probably the best you can do, since raising their annual pay will be important. You'll
be expending over $50K per year per child by paying for their education, which exceeds
what you could just give.
unless Congress gets there[sic] act together.


Avoid references for/against political issues, or proposed tax law changes, as they are not allowed in this forum.
Last edited by MathWizard on Thu Nov 29, 2012 4:01 pm, edited 1 time in total.
Topic Author
sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

Grt2bOutdoors wrote:This is not meant to be snarky, however unless you know you are going to leave this planet shortly, why are you thinking about it? Enjoy your life including time spent with those you care about most and spend it now. You are 49, not 85 (no disrespect intended to those forum members who are, but you get the point). You are fortunate than most and may i recommend Charles Dickens "A Christmas Carol" to drive it home.

Well, I do have health issues and you never know. I think estate tax planning is probably even more important for younger families with some acquired wealth. The purpose of my post is to elicit some estate planning strategies but I promise I will and have considered the philosophical and spiritual side of things including being very generous without having the federal government do it for me. This may not be the forum or avenue to elicit such estate planning expertise but I have had much success in the past here with the investing side of things and was hoping to get some thoughtful advice.
Grt2bOutdoors
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Re: Estate Tax Changes

Post by Grt2bOutdoors »

MathWizard provides some excellent and thoughtful advice. Set up a trust for each of your kids and gift them each $26K per year, next year that becomes $28K. Also, have you looked into a life insurance trust to pay your estate and inheritance taxes? I believe there is another thread on the forum about Estate Planning/Succession with some suggested books, might want to look into it.
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ted123
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Re: Estate Tax Changes

Post by ted123 »

I agree that tax planning is important at any age, but it may be a bit late to do anything that needs to be accomplished by the end of the year. You should definitely talk to your estate planning lawyer ASAP.

That said, I'd expect there to be some change to the existing estate tax law and would, myself, be reluctant to take any drastic actions (such a large irrevocable gift) based solely on the situation as it currently exists.
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Prokofiev
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Re: Estate Tax Changes

Post by Prokofiev »

sonowwhat? wrote:If I gift say $3 mil and keep $2 mil then when I die the whole $2 mil will be taxed. They will look back and see that I used up to and in this case over the $2 mil when I gifted the $3 mil in 2012. That is I essentially used up the entire credit this year so unless I gift the whole thing now while the unified credit is $10 million there is no way to avoid the 55% rate unless Congress gets there act together.
I'm not sure this is correct. You have a $5M lifetime gift exclusion per person for 2012. Gifting $3 million in 2012 should NOT result in paying estate tax on the $2M you keep. Please consult an estate specialist, but I don't believe the "Look-back" is correct.It is possible they could enact something like that, but under current law, there is not a look-back to previous years. Perhaps Allan S-our resident estate planning expert could provide some details?

But the law for 2013 doesn't really affect you unless you are planning on saying good bye soon. Who knows what estate tax will be applicable in 10-20 or even 40 years for you and your wife. Seems too early to do much of anything.
Last edited by Prokofiev on Thu Nov 29, 2012 4:39 pm, edited 1 time in total.
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ResNullius
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Re: Estate Tax Changes

Post by ResNullius »

At your age and circumstances, I wouldn't do anything right now. If we get some type of permanent solution from DC, then you can discuss situation with your estate attorney. I wouldn't give away the ranch at your age, because you just might need it down the road for you and your wife. And by the way, you can leave any amount to your wife, and the same for your wife to you. When the last of you dies, what difference does it make. I would wait for clarity before making any big decisions. If you were older and had 2 or 3 times as much, then I would see things differently.
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Re: Estate Tax Changes

Post by JDCPAEsq »

Make sure you have wills taking full advantage of the marital deduction and the exemption equivalent for each of you and then forget it. I certainly wouldn't make any substantial lifetime transfers to children at age 49.
John
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Re: Estate Tax Changes

Post by Alan S. »

JDCPAEsq wrote:Make sure you have wills taking full advantage of the marital deduction and the exemption equivalent for each of you and then forget it. I certainly wouldn't make any substantial lifetime transfers to children at age 49.
John
I agree. While Washington is dysfunctional and since you cannot predict what they will come up with, and more importantly estate advisors can only guess as well, you should wait until the unified credit has been decided. If it reverts to 1mm on January 1st, that will likely only be temporary and further, for any decedents that are severely disadvantaged due to lack of action in Washington, there will be some leeway. Remember, we went through a similar situation in 2010 when the estate tax disappeared after everyone assumed it would not. Congress then allowed estates to elect the better of the 2010 provisions or the prior year provisions for 2010.
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sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

JDCPAEsq wrote:Make sure you have wills taking full advantage of the marital deduction and the exemption equivalent for each of you and then forget it. I certainly wouldn't make any substantial lifetime transfers to children at age 49.
John
I have a "Credit Shelter Trust" or "Bypass Trust" provision in my Will so I assume that is all I need to do to take maximum advantage of both. My understanding is my wife would notify IRS of the amount (whatever my unused exemption is and is allowed by law at the time) she is disclaiming and notify the IRS within 9 month in writing. Apart from that, I am unaware of anything else I can do to maximize these.
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Peter Foley
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Re: Estate Tax Changes

Post by Peter Foley »

While this would still leave a lot of money on the table, why not do a 529 plan for each of your kids before the end of the year to shelter a portion of it just in case? $100k for each child would be reasonable.
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Re: Estate Tax Changes

Post by sscritic »

Peter Foley wrote:While this would still leave a lot of money on the table, why not do a 529 plan for each of your kids before the end of the year to shelter a portion of it just in case? $100k for each child would be reasonable.
Not if he dies. The wife's $50k will be sheltered, but if you die within the five years, you can't use the annual exclusion for the years after you are dead. Of course, if you put in in now and die on January 2, you will only lose 3 years worth. [I think you get the annual exclusion in the year you die, but to be sure I would have to look it up. I am tired, so I will let someone else look it up.]

I guess then he should let his wife put in the $65k and he only $35k so the cost of his dying would be less. Or wait until January 1 when the annual exclusion will be $14k so his wife can do $70 and he would only have to do $30k. But then if he dies the next day, they will recapture 4 years or $24k rather than 3 years or $21k if they do it now. Boy, this is one of life's tough decisions; what to do, what to do.

Wait that's wrong (or is it?). If you put in $50k is that five years of $10k or $13k, $13k, $13k, $11k, $0k? I know it is right on the gift tax return form, front page I think, but my memory fails me.
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Re: Estate Tax Changes

Post by bluemarlin08 »

Wait to see what changes. If exclusions remain at 1,000,000, consider purchasing no lapse second to die life insurance and place in Irrevocable Trust, rates are cheap if you are healthy.
JDCPAEsq
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Re: Estate Tax Changes

Post by JDCPAEsq »

bluemarlin08 wrote:Wait to see what changes. If exclusions remain at 1,000,000, consider purchasing no lapse second to die life insurance and place in Irrevocable Trust, rates are cheap if you are healthy.
Why are you suggesting this? He appears to have plenty of liquidity to pay estate taxes.
John
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Re: Estate Tax Changes

Post by Grt2bOutdoors »

He may have liquidity, however I believe the whole thrust of the OP's original post is to keep as much of the assets in the family as opposed to "sharing" :dollar it.
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bluemarlin08
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Re: Estate Tax Changes

Post by bluemarlin08 »

Very cheap risk management and allows the family to retain more assets.
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mephistophles
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Re: Estate Tax Changes

Post by mephistophles »

sonowwhat? wrote:
JDCPAEsq wrote:Make sure you have wills taking full advantage of the marital deduction and the exemption equivalent for each of you and then forget it. I certainly wouldn't make any substantial lifetime transfers to children at age 49.
John
I have a "Credit Shelter Trust" or "Bypass Trust" provision in my Will so I assume that is all I need to do to take maximum advantage of both. My understanding is my wife would notify IRS of the amount (whatever my unused exemption is and is allowed by law at the time) she is disclaiming and notify the IRS within 9 month in writing. Apart from that, I am unaware of anything else I can do to maximize these.
I have experience with the problem you are facing. In my opinion the most realistic thing to do is wait and see what comes out of the fiscal cliff talks. That should happen in a few months. Then, make your plans accordingly.
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Calm Man
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Re: Estate Tax Changes

Post by Calm Man »

I figure between your age and your death the laws will change 20 more times. I would not plan around it.
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Re: Estate Tax Changes

Post by bsteiner »

I agree with Grt2bOutdoors. It would be very difficult to take this matter on before year-end when we have so many clients with far greater net worth who are making large gifts.
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steve roy
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Re: Estate Tax Changes

Post by steve roy »

I wouldn't sweat it.

As of today, one side is mad at the other side for their opening tax hike/spending cut proposal. But remember, it's the opening proposal. In a negotiation, each side stakes out positions and then horse trades. To try and guess where the negotiations will end up four ... or eight weeks hence is, at this stage, kind of futile.

Wait until after, say, December 23rd to start worrying. My prediction is there will be resolution between the parties sometime around the last week of December and the last week of January.
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Re: Estate Tax Changes

Post by letsgobobby »

I am not going to discuss proposed tax policy. I am going to quote a newspaper article from today in which a prominent Democrat argued that the $3.5M exemption is too low and the 45% rate too high and would be a deal breaker for her.

I am not going to discuss proposed tax policy. I am telling you that I am planning on a $7M or more per couple exemption going forward.
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Re: Estate Tax Changes

Post by bluemarlin08 »

There have been a large number of threads recently ostensibly about future tax rates, especially marginal rates. Given the current situation - that this is an area of current debate, the outcome of which cannot be foretold - such posts amount to nothing more than speculating over proposed legislation which is not an acceptable topic on thsi site.

Once the dust has settled and we have a set of laws upon which people can take action, we will reopen the topic.


Why isn't this thread locked?
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sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

bluemarlin08 wrote:There have been a large number of threads recently ostensibly about future tax rates, especially marginal rates. Given the current situation - that this is an area of current debate, the outcome of which cannot be foretold - such posts amount to nothing more than speculating over proposed legislation which is not an acceptable topic on thsi site.

Once the dust has settled and we have a set of laws upon which people can take action, we will reopen the topic.


Why isn't this thread locked?

This (My) post is asking about actionable estate planning under current law. Current law reduces both the unified credit and increases the rate effective January 1. It is not speculative. It is asking what to do given current law. So far I have have gotten great ideas around charitable gifting, 529 funding and others. There are thousands of people running to estate planning attorneys as I write this so this is a current issue that people are taking current actions on. This board to be useful needs to add to the intellectual value of the decesions being made NOW. I think the intent of the administrators is not to turn these boards into political forums or what if forums but if we cannot discuss options given current law even though such laws may be in flux then it stifles intellectual discussion and these boards become useless. I will let the administrators decide and not try to play to be a wannabe forum police. If it is of no value to you, you always have the option of just not clicking on the topic but as for me, many of the post have been helpful and the very reason why I come here.
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HomerJ
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Re: Estate Tax Changes

Post by HomerJ »

You're 49 and you're married.

And even if you both get killed in a car accident on January 2nd, your kids will still have a million each, and be in the top 0.1% of the entire world (for their age group) and will do just fine.

I wouldn't worry so much about estate taxes. I'm sure the limits will be raised again...

If you really can't stop worrying about it, then buy a couple million in term life insurance... 20-year policy will only cost you $3000 a year I bet.

Gifting millions to a bunch of teen-agers seems like an extreme move, in my opinion.
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Re: Estate Tax Changes

Post by bluemarlin08 »

It is not speculative.
As others have posted, what we end up with is all dependent on what happens with Congress regarding the Bush tax cuts, no one knows how that will turn out so I disagree, it is very speculative and very political. It has been my understanding that the moderators are reluctant to allow discussing speculative, political tax policies.
letsgobobby
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Re: Estate Tax Changes

Post by letsgobobby »

Interesting idea to buy a short term life policy for those in the grey zone. A pretty ingenious solution. Even a one year policy covers the risk.
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sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

Term Life a good idea, unfortunately I have some medical issues that pretty much make the any new life insurance cost prohibitive. Good idea though. One I had not thought of and for someone with the same estate concerns as I have would be a great solution. Again, this is the type of feedback I am looking for.
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Re: Estate Tax Changes

Post by bluemarlin08 »

Consider buying term on your spouse, accomplishes the same thing, assuming taxes are being paid at the second to die.
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sonowwhat?
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Re: Estate Tax Changes

Post by sonowwhat? »

bluemarlin08 wrote:Consider buying term on your spouse, accomplishes the same thing, assuming taxes are being paid at the second to die.
Now thats good thinking!!!!!! Matter a fact, might be the best idea yet given I can use an AB trust (Credit Shelter Trust) to utilize whatever the unified credit is at the time then in the unlikely scenario we both kick the bucket her insurance could fund estate taxes. If tax laws change permanently, then just drop the term life. I LIKE IT!
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Re: Estate Tax Changes

Post by reggiesimpson »

Look at a SLAT (spousal limited access trust). You can have your cake and eat it to! See an estate atty for details ASAP!
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dmcmahon
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Re: Estate Tax Changes

Post by dmcmahon »

Calm Man wrote:I figure between your age and your death the laws will change 20 more times. I would not plan around it.
Sadly, this is likely to be so.

To the OP:

In thinking about this, if one presumes some middle-ground exemption is ultimately adopted and it's indexed to inflation, then in retirement one could easily spend down a family fortune such as yours to the point where it's below the future inflation-adjusted limit. It's likely your assets will be below such a limit if split between you and your wife. Certainly, I would never put myself into insolvency for tax reasons.

I'm not an attorney or investment professional so in the spirit of the original question soliciting "ideas" that you might discuss with a suitable professional:

You could hedge your bets via a trust set up for your heirs, and using the annual gift tax exemption as described by MathWizard you can put away some portion of your estate gradually over decades. You could put shares in the LLC, which due to illiquidity and control issues may be valued lower (this is an area where you'd want to consult an attorney) at time of transfer. The beauty of this approach is that you can, I think, retain control of the LLC and therefore of the underlying assets. Such a gradual approach bypasses consideration of the exemption amount, and moreover allows you plenty of time to adapt to changing circumstances. If, for instance, your investments sour, you can reduce or eliminate contributions in future years.
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Re: Estate Tax Changes

Post by BruDude »

sonowwhat? wrote:
bluemarlin08 wrote:Consider buying term on your spouse, accomplishes the same thing, assuming taxes are being paid at the second to die.
Now thats good thinking!!!!!! Matter a fact, might be the best idea yet given I can use an AB trust (Credit Shelter Trust) to utilize whatever the unified credit is at the time then in the unlikely scenario we both kick the bucket her insurance could fund estate taxes. If tax laws change permanently, then just drop the term life. I LIKE IT!
That's what a second to die policy is for
BIGal
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Re: Estate Tax Changes

Post by BIGal »

The estate-tax proposal released on Tuesday was signed by 36 people, including Warren Buffett, chairman and chief executive of Berkshire Hathaway Inc.; John Bogle, founder of The Vanguard Group Inc.; Abigail Disney, a filmmaker and scion of the entertainment family; Bill Gates Sr., founder of Preston Gates & Ellis LLP; and Drummond Pike, a principal at Equilibrium Capital.

“We believe it is right to have a significant tax on large estates when they are passed on to the next generation,” the statement said. “We believe it is right morally and economically, and that an estate tax promotes democracy by slowing the concentration of wealth and power.”

Please explain the thinking of these people to me. I see John Bogle is a member of those seeking "slowing the concentration of wealth and power." Is that the belief of Bogleheads in general?
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Steelersfan
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Re: Estate Tax Changes

Post by Steelersfan »

BIGal wrote: I see John Bogle is a member of those seeking "slowing the concentration of wealth and power." Is that the belief of Bogleheads in general?
I'm only one, but it makes sense to me.
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Re: Estate Tax Changes

Post by chaz »

Steelersfan wrote:
BIGal wrote: I see John Bogle is a member of those seeking "slowing the concentration of wealth and power." Is that the belief of Bogleheads in general?
I'm only one, but it makes sense to me.
It does to me also.
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Jerilynn
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Re: Estate Tax Changes

Post by Jerilynn »

BIGal wrote:The estate-tax proposal released on Tuesday was signed by 36 people, including Warren Buffett, chairman and chief executive of Berkshire Hathaway Inc.; John Bogle, founder of The Vanguard Group Inc.; Abigail Disney, a filmmaker and scion of the entertainment family; Bill Gates Sr., founder of Preston Gates & Ellis LLP; and Drummond Pike, a principal at Equilibrium Capital.

“We believe it is right to have a significant tax on large estates when they are passed on to the next generation,” the statement said. “We believe it is right morally and economically, and that an estate tax promotes democracy by slowing the concentration of wealth and power.”

Please explain the thinking of these people to me. I see John Bogle is a member of those seeking "slowing the concentration of wealth and power." Is that the belief of Bogleheads in general?
It's proposed legislation and their reasons are no doubt political, hence not within the scope of this forum according to, "Da Rules".
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
KyleAAA
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Re: Estate Tax Changes

Post by KyleAAA »

I don't think it's really worth worrying about what the estate tax laws will be like 30 or 40 years from now. There's no way to know this far in advance.
chaz
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Re: Estate Tax Changes

Post by chaz »

KyleAAA wrote:I don't think it's really worth worrying about what the estate tax laws will be like 30 or 40 years from now. There's no way to know this far in advance.
Not even next January, 2013!
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Re: Estate Tax Changes

Post by LadyGeek »

bluemarlin08 wrote:There have been a large number of threads recently ostensibly about future tax rates, especially marginal rates. Given the current situation - that this is an area of current debate, the outcome of which cannot be foretold - such posts amount to nothing more than speculating over proposed legislation which is not an acceptable topic on this site.

Once the dust has settled and we have a set of laws upon which people can take action, we will reopen the topic. Why isn't this thread locked?
It is now, for the reasons stated by bluemarlin08. Alex Frakt has posted this sticky at the top of the forum: Future Tax Rate Questions are Off Topic Until Congress Acts
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Locked