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My grandfather recently passed away. He worked hard, lived frugally and wound up dying with an estate we're figuring was about $4 million. He left it to us grandkids. It seems that between state and federal taxes, his estate will be owing $2 million?! (first 2 million is exempt from federal tax, then, what, almost 1/2 to the gov't, and the state doesn't have the higher exemption and because we aren't kids or spouse there's a higher tax rate winding up to add up to something just a little shy of another million?

IS that the way things are? or was he foolish? he didn't like lawyers and their hourly rate / wind up to higher bills so that may be why he never went to one about estate planning. and his accountant may or may not have said anything.

seems like job security for lawyers - either pay the estate tax or pay a lawyer to protect your assetts? The lesser of 2 evils? and who makes laws - lawyers so when they get back into private practice, they have ensured work for the industry.

is the person paying millions in estate taxes the norm or exception?
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A $2000 (or less) trust would likely have helped avoid some of the taxes.

Don't blame the lawyers (well you can, but blame the ones in Congress).

If you have a 4 mil estate, you can't be picky about a small expense to protect it from the govt. But then, I often see seniors that just don't care if their relatives get a dime. Perhap it was his wish that you get what you get and the govt can have the rest.
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IS that the way things are? or was he foolish? he didn't like lawyers and their hourly rate / wind up to higher bills so that may be why he never went to one about estate planning. and his accountant may or may not have said anything.

Remember the Fram(?) oil filter commercials? "Pay me now or pay me later." And you haven't even seen yet what it's going to cost you to get through probate. Yes, he was lower-case foolish, but what's done is done.

seems like job security for lawyers - either pay the estate tax or pay a lawyer to protect your assetts? The lesser of 2 evils? and who makes laws - lawyers so when they get back into private practice, they have ensured work for the industry.

is the person paying millions in estate taxes the norm or exception?


The exception, because most people with estates worth worrying about plan for the estate tax. This is my biggest reason for being in favor of repeal. There's too much of an industry devoted to avoiding estate tax. I think those resources would be better directed elsewhere.

Not that you asked, but do not emulate your grandfather in handling the estate. Make sure that whoever is administering it gets competent legal/accounting help.

My condolences on the loss of your grandfather.

Phil
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Well, besides the two other excellent comments, I doubt you've begun to experience the possible ill feeling between the others who may benefit from the bequest.

When there is no plan anyone can take personally what "their share" should be, and there is no consideration for the personal situation of those inheriting the money. Probate is NOT the place to hash these postentially emotional, financial and legal issues.

FWIW my father, who I loved dearly, and who was a lawyer, and who during a lifetime was generally NOT foolish, died without a will. It contributed to killing my mother, a dispute with my brother that led to our not talking for 25 years, AND higher taxes. The taxes were the least of it. Get a will and legal advice.

Hockeypop
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Thanks to everyone for your advice!
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FWIW my father, who I loved dearly, and who was a lawyer, and who during a lifetime was generally NOT foolish, died without a will.

When Chief Justice Burger died it was widely reported that he went to his dirt nap either without a will or with a lack of estate planning that cost bundles. So at least your father is in esteemed company.

Phil
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... an estate we're figuring was about $4 million. ... his estate will be owing $2 million?! (first 2 million is exempt from federal tax, then, what, almost 1/2 to the gov't ...)

I think you overestimate the taxes. You've got the right rates and figures, but aren't applying them correctly.

The first 2 million is exempt from Federal estate taxes. But it's the only the amount over that that gets taxed. So you're looking at about $1 million in federal estate taxes, not $2 million. Plus your state taxes, if any.

is the person paying millions in estate taxes the norm or exception?

The exception. Most people die with estates well under the current $2 million threshold for paying estate taxes.

--Peter
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While I respect Phil's opinion I don't agree with doing away with estate taxes.
I do agree with the current levels and believe they should be indexed for inflation.
Was your granddaddy foolish? Heck no...he obviously made more good decisions than bad ones...no one is perfect.
If you drink wine buy a really good bottle of wine and toast your grandaddy.

buzman
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>> While I respect Phil's opinion I don't agree with doing away with estate taxes.
I do agree with the current levels and believe they should be indexed for inflation.
<<

I think an exemption of $3-5 million, adjusted for inflation, is reasonable.

As far as a "death tax" that really hits people of all classes, how about this?

My dad passed away in 2005. From 2005 to 2006, my mom's household income dropped by about $8000. This was because she inherited my dad's Social Security benefit which was higher than her own, but she lost hers in the process. She was getting nearly $700 a month on her own which she lost when she became widowed.

In 2006 she had to change filing status from MFJ to single. In so doing, her tax bracket jumped from 15% to 25% despite losing that income from the second SS check. And to add insult to injury, it meant that 85% of her smaller SS benefit was taxable instead of 50% of a larger combined benefit when filing MFJ. And she lost a personal exemption and half the standard deeduction.

So despite seeing income drop from about $56K to $48K from 2005 to 2006, her taxes rose from about $3,500 to about $7,500 in one year...all because she lost her husband of more than 49 years.

That's a "death tax" that really hits the middle class and below.

#29
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Even if you don't owe a lot of estate tax and have a lawyer help plan every aspect of your will and estate, estates still mean job security for lawyers. I hate to think how much my sister-in-law paid those lazy scum who helped drag out an uncontested will for two whole years, and only managed to notify her and the other heirs on April 2: "Oh, by the way, you all owe tax for the interest income the estate made before it closed. Sorry we didn't mention that before; we didn't think you'd mind. But don't worry, because you have a big net loss, you'll take a big hosing now but you'll have carryover losses for ten years. Yeah, guess that means each of you will have another pile of taxable income. Unfortunately you will have to have K-1s, and of course we will gladly prepare them for you for a fee. You already filed? Gee, sorry about that. We will try and get you your K-1s sometime soon."

Far as I'm concerned, there is a simple reason the law is complex: it's mostly made and interpreted by lawyers, who recognize that if law were remotely accessible to the average person, they would have a much tougher time billing you $400 per hour for arrogance, sloth and lousy advice. Asking Congress to simplify the law is like asking General Motors to build bicycle paths. We have reached the stage where the decision to sue signifies that one hates the other side so venomously one would rather lawyers have the money than the other side. That takes a level of hatred that would literally burn the banknotes rather than let the other side have them--because that's the best that can occur.

Try telling a judge sometime that something is 'unjust.' The judge will look at you like you're a moron (in his eyes, that's just, because you have just proven your moronosity) and say: "Justice has nothing to do with it. What matters is how the law applies to the facts." Or go to law school and utter the word 'justice' in class. Wait for the professor's blistering reply: "Young man, you seem to have gotten lost. Evidently you enrolled in a course in justice, but you have instead stumbled into a course on the law."
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ziggy29 writes,

In 2006 she had to change filing status from MFJ to single. In so doing, her tax bracket jumped from 15% to 25% despite losing that income from the second SS check. And to add insult to injury, it meant that 85% of her smaller SS benefit was taxable instead of 50% of a larger combined benefit when filing MFJ. And she lost a personal exemption and half the standard deeduction.

So despite seeing income drop from about $56K to $48K from 2005 to 2006, her taxes rose from about $3,500 to about $7,500 in one year...all because she lost her husband of more than 49 years.

That's a "death tax" that really hits the middle class and below.



Heck, I've been paying at the single rates for years. We could stop all the complaining by taxing married people at the same rate as singles. We'll need the added revenue to pay the interest on all the money Bush borrowed over the past 7 years.

intercst
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Even if you don't owe a lot of estate tax and have a lawyer help plan every aspect of your will and estate, estates still mean job security for lawyers. I hate to think how much my sister-in-law paid those lazy scum who helped drag out an uncontested will for two whole years,

There's a gaping hole in this story. I've administered two uncontested wills from a distance, neither simple, and both closed the day the law allowed, which was a long way shy of 2 years. Someone dropped the ball other than the lawyers.

Phil
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>>There's a gaping hole in this story. I've administered two uncontested wills from a distance, neither simple, and both closed the day the law allowed, which was a long way shy of 2 years. Someone dropped the ball other than the lawyers.<<

Some of it was due to delays unloading the real estate, for which I don't blame the lawyers. However, I have been following the saga for a couple of years now, and when I asked about the status I often heard 'we're waiting on the lawyers.' Lawyers in different states, sometimes. So that's why I tend to think that the lawyers involved dragged things out. And when we learned this year, three full months after the closing, about the K-1 business--which is the kind of thing lawyers are supposed to tell you is coming--then as far as I'm concerned it's consistent with the diagnosis of general legal sloth.

If you like, I'll ask my SIL just how much the estate paid the lawyers over the course of its existence, then run that number by you, and you can tell me how reasonable that sounds. The assets were some rental houses and a duplex, significant cash/investment holdings, a primary residence and a vacant lot. Grand total was about $2 million.

I hope it's a long time before I perform my service as my mother's executor, and I hope she manages to enjoy her last nickel on her day of passage. But when I am the fiduciary one day, I will select the legal help with care--and if it drags its feet, I'll find legal help that won't.
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But when I am the fiduciary one day, I will select the legal help with care--and if it drags its feet, I'll find legal help that won't.

A key point, and one too often forgotten. One hates to quote Ann Landers, but as she said, "Half the lawyers graduated in the bottom half of their class."

The estate administrator's duties are deceptively simple: marshall the assets, pay the bills, and distribute the loot to the heirs/legatees. At the first sign that something's going awry it's critical to refocus on these simple goals and get rid of the stumbling block.

The estate you describe sounds pretty complicated, but I take your point about suspected delays. If the estate was open more than a year the estate income tax implications should have been apparent to the administrator no later than 3 months 15 days after the close of its first tax year, so obviously someone who should have known better goofed.

I join you in your hope that it's years before you have to perform this service for your mother, and that the only thing anyone fights about is who has the fondest memories.

Phil
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I also won't be wedded to my mother's choice of lawyers, as my mother is by no means a good judge of anything except artwork and cat hair. I remember when she appointed me, and sent me a copy of her will. She'd used some Cletus rural Colorado lawyer. I noticed that the page numbering was incorrect on the will. Looking at that, my thought was: "Okay, if mom stays there, this guy isn't handling the estate on the grounds that even if he himself is a good lawyer, he hires dumb people who don't check their work carefully." However, she moved to the land of lakes and Scandinavians, so it's a non-issue.
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"Okay, if mom stays there, this guy isn't handling the estate on the grounds that even if he himself is a good lawyer, he hires dumb people who don't check their work carefully." However, she moved to the land of lakes and Scandinavians, so it's a non-issue.
------------------------------------------------------------------------

It could an issue.

If the will was drawn in Colorado and she no longer is a resident you could have delays and/or unnecessary costs.



buzman
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not007: "My grandfather recently passed away. He worked hard, lived frugally and wound up dying with an estate we're figuring was about $4 million. He left it to us grandkids. It seems that between state and federal taxes, his estate will be owing $2 million?! (first 2 million is exempt from federal tax, then, what, almost 1/2 to the gov't, and the state doesn't have the higher exemption and because we aren't kids or spouse there's a higher tax rate winding up to add up to something just a little shy of another million?

IS that the way things are? or was he foolish? he didn't like lawyers and their hourly rate / wind up to higher bills so that may be why he never went to one about estate planning. and his accountant may or may not have said anything.

. . .

is the person paying millions in estate taxes the norm or exception?"


First, my condolences on your loss.

Second, you do not mention when you grandmother died, but before she died, your grandparents probably/possibly could have used an A-B trust structure to avoid "losing/not using" her lifetime exemption.

Third, neither you nor anyone else has mentioned GST (Generation Skipping Tax) but bequests from grandfather to grandkids does skip a generation and will trigger questions about potential GST.

Fourth, as to your last question, a person paying millions in estate tax is definitely not the norm. IIRC, only about 2-3% of estates pay estate tax (and not all of those pay millions in estate tax).

Furthermore, most people never have estates sizeable enought to worry about estate tax; of those who do, many(most?) seek advice and plan to minimize or avoid it.

Fifth, IIRC, charitable bequests still pass free of estate tax. One alternative to paying estate taxes would have been to leave the exempt equivalent amount to be divided among the grandkids with the balance/remainder of the estate going to your grandfather's favorite charity or charities.

Sixth, probably not much he could have done about it, but if your grandfather had made it to 2009, the exemption equilavent amount would have been $3.5M (assuming no changes in current law).

Regards, JAFO

Disclaimer

Yes, I am a lawyer (but I have no estate or probate practice), AND THIS IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.
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Wait for the professor's blistering reply: "Young man, you seem to have gotten lost. Evidently you enrolled in a course in justice, but you have instead stumbled into a course on the law."

Just taking a quick poll. Did anyone not read this in their head using John Houseman's voice?
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Sixth, probably not much he could have done about it, but if your grandfather had made it to 2009, the exemption equilavent amount would have been $3.5M (assuming no changes in current law).

Regards, JAFO


What's the current exemption amount?

Karen
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Wow! I wish that I could give ziggy's post a super-rec, because it's worth 10 of most rec'd posts.

I'm stunned. Your example illuminates a problem that I was completely unaware of. Since many wives outlive their husbands, it is an important women's issue...but I never saw anyone else describe it.

Wendy
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I didn't understand the complaint, myself. One person with $48,000 income paid more income tax (filing single) than two people with $56,000 income (filing MFJ). How exactly is that a "death tax"? The single person has (at least) one less exemption and half the standard deduction of the MFJ couple, so more income is taxable. No surprise there.
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>> I didn't understand the complaint, myself. One person with $48,000 income paid more income tax (filing single) than two people with $56,000 income (filing MFJ). How exactly is that a "death tax"? The single person has (at least) one less exemption and half the standard deduction of the MFJ couple, so more income is taxable. No surprise there. <<

It's no surprise, that's true, and that is the way the tax laws work. But it *is* a death tax, in some sense, in that the death of a spouse directly resulted in a massive tax increase by virtue of a required change in filing status. Had there not been a death, there would be no such massive household tax increase.

And unlike the estate tax, which many conservatives call a "death tax," this tax is levied directly on surviving spouses, not other heirs. I don't claim to know what should be done about it, but in terms of pouring salt on a fresh wound, the estate tax has nothing on this form of death-related tax hike.

#29
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And unlike the estate tax, which many conservatives call a "death tax," this tax is levied directly on surviving spouses, not other heirs.

Sorry, but IMHO it's no different than taxes levied on the single folks now. They don't enjoy any marital deductions now and won't after they inherit something, either. Why should a surviving spouse be treated any differently under our tax laws? After all, they are single again even if they were once married. It's not a "death tax" in any sense of the words. It's simply a recognition of one's filing status under our tax laws.

Regards ... Pixy (who's as conservative as they come)
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>> Why should a surviving spouse be treated any differently under our tax laws? <<

I never said they should. I'm just pointing out how much taxes rise after your spouse dies, and that there are other forms of additional taxes caused by death, and ones that hit low net worth households.

>> It's not a "death tax" in any sense of the words. It's simply a recognition of one's filing status under our tax laws. <<

Really? What caused the change of filing status back to single? (Hint: it wasn't divorce.)

#29
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Really? What caused the change of filing status back to single? (Hint: it wasn't divorce.)

This is part of estate planning - if you are part of a couple, one of you is going to eventually be alone. Whether it's covered by life insurance or a pension distribution choice, it's pretty much inevitable and needs to be planned for.

rad
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Really? What caused the change of filing status back to single? (Hint: it wasn't divorce.)


That doesn't make it a "death tax" any more than getting divorced results in a "divorce tax" or choosing not to marry in the first place results in a "bachelor(ette) tax." These labels are silly.

Her income tax increased because she has a 60% higher income now on a per individual basis.
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That doesn't make it a "death tax" any more than getting divorced results in a "divorce tax" or choosing not to marry in the first place results in a "bachelor(ette) tax." These labels are silly.

Her income tax increased because she has a 60% higher income now on a per individual basis.


This is true, but it's something I doubt very many people think of or plan for. And while you are right its not a "death tax", I think ziggy is very fair to call it a "death-related tax", because it was the death of the spouse that changed the income tax situation.

I don't think there really is anything that can, or should, be done about it, except for trying to plan for that sort of thing in your estate planning so it doesn't come as a surprise. I would definitely that as a "salt in the wound" effect -- to just lose spouse, have Social Security flip your benefits around, and then realize the IRS is going to look at you differently for the first time in 49 years. Wow.

And while the income "per individual" has gone up, I doubt the surviving spouse's expenses halved, so the real question (to determine the full impact) is what does her 'net income' (ie money for discretionary spending) look like? I know I'd be a lot more frustrated if my gross income went down, fixed expenses stayed the same, and taxes went up -- meaning my spending money just shrunk. I'd be less annoyed if my gross income went down, fixed expenses went down, and taxes went up -- and it came out about a wash.
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I don't think there really is anything that can, or should, be done about it, except for trying to plan for that sort of thing in your estate planning so it doesn't come as a surprise. I would definitely that as a "salt in the wound" effect -- to just lose spouse, have Social Security flip your benefits around, and then realize the IRS is going to look at you differently for the first time in 49 years.

Well, the good news for couples with kids nowadays is that by the time they get to the elderly loss of spouse tax effects they will have already been through the loss of kids tax effects, which are much more pronounced nowadays than when I reached adulthood.

You make an excellent point about including the loss of income in planning. I was handling my parents' finances when my mother died, and the drop in monthly income was significant. (Taxes were irrelevant in their case because of the high expenses of home health care.)

Phil
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