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Author: susan400 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120829  
Subject: re post above estate tax avoidence Date: 11/19/2009 1:02 AM
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Regarding my post above. ""Estate, income tax avoidance"" Thanks to Peter, Greg, Phil Bill VKG, etc. For their replies.

Literally someone I know is thinking about doing this, I know it is nuts and risky.Not to go on an on, but maybe it is instructional for the forum. Some more detail:

A is 80, good health but apparently has developed a hatred for obsession for paying taxes, especially in the Obama era. With an objective of avoiding taxes, A is going to transfer 48 acres of developable land in Maryland to grandkid B for nothing, 1$ to make it a legal transfer.

A week or so later, they plan to make a private agreement among just the 2 of them, where B will pay A in cash $2000 a month for 15 years, amounting to $300,000 total.

- They know the basis for B will be zero.
- I think family to family means paying no or a small transfer fee.
- The 300,00 is perhaps ½ the PMV and paying over time means it is far less than the PMV
- It is unclear at death of earlier than 15 years, how this gets settled but supposedly B will then pay heirs, C an D. C is the parent of B, D doesn’t even know this is happening. If D wants to go straight and reports his 1000 as n installment sale, would that trigger things?

The objective is get the asset transferred before death to avoid inheritnce tax and avoid paying capital gains taxes as well. I know is it wrong and risky even for someone with patriotic limitations. Total estate oproior to this woul be ~ 1.4 million.

But:
+ How might it be discovered, why would the IRS even know? Do tax authorities review deed transfers?
+ If it is, A is in trouble for tax evasion-understood, could B be at risk for complicity, helping a crime of tax avoidance along? Could B claim, he didn’t know, and he can pay in cash, no crime there?
+ Will not heirs C&D have to sign off at estate settlement time saying they know of no asset than has not been included in the estate, thereby committing fraud as well?
+ If the “gift” portion is, call it 600,000, isn’t that under the lifetime gift tax threshold?

+ Are private agreements like this a common things to avoid taxes and scrutiny?
+ I assume any attorney reviewing would warn the client they are committing a crime?
Any other view there? Is the attorney liable for allowing it to happen?

Yes I agree it amounts to an annuity or it is an installment sale.
What is wrong with a private annuity? (other than here because it is tax avoidance)

Thanks in advfance for all replies to this interesting topic. I fear in this case it iss too late. Geez, I wish there WERE, better tax angles for all. !!
Susan400
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107717 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 1:47 AM
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Any other view there? Is the attorney liable for allowing it to happen?

If the lawyer assists with fraud or illegal activity, then the lawyer would have liability. A lawyer can not prevent a client from ignoring their advice. There are limits to privilege.

The objective is get the asset transferred before death to avoid inheritnce tax and avoid paying capital gains taxes as well. I know is it wrong and risky even for someone with patriotic limitations. Total estate oproior to this woul be ~ 1.4 million.

Speculating on how the house of cards will collapse is not useful. Anyone in the family could cause this to unravel. Anyone knowing about the tax evasion could report it to the IRS to collect the bounty.

1.) The first million of an estate is not taxed.
2.) The cost basis is stepped up on date of death.

A proper estate plan can minimize income and estate taxes without committing tax fraud. It maybe possible to structure an installment sale tied with annual gifts. As highly appreciated property, a partial donation would reduce income and estate taxes. There are options which are legal and minimize both his and the grandchilds taxes and liability.

Deeds are public documents. It isn't just the IRS that is of concern.

How much income does "A" have? If it mostly Social Security, $24,000 a year would result in limited income tax while preserving the cost basis for the grandchild.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107718 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 6:05 AM
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+ How might it be discovered, why would the IRS even know? Do tax authorities review deed transfers?

They review all sorts of things, including letters. The one taxpayer I dealt with personally who went to jail was turned in by a PO'd ex. Coupled with the fact that people who defraud the gummint can't keep their traps shut, and I'd say the odds are pretty good they'd get caught. Look at how many people already know about this scheme, and they haven't even gotten to the public record part of it.

Thanks for the clarification of what's going on. It's evasion, and I would assume they'd go after both A & B.

Geez, I wish there WERE, better tax angles for all.

What, you want the gummint to give them money? Is there anyone involved in this process who has bothered to find out what the law is, or are they so obsessed with sticking it to that Kenyan that they're willing to go to jail and/or pay huge fines? If A went to his dirt nap today there would be zero estate tax, and whoever inherited the property would inherit it with a basis equal to current fair market value. That translates into zero tax, but evidently that's not enough for, if I understand you correctly, these people who consider themselves patriots.

Sheesh!

Phil
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107719 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 6:10 AM
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The first million of an estate is not taxed.

For decedents dying in 2009 estate tax doesn't kick in until a gross estate of $3.5 million.

Phil
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107720 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:20 AM
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The first million of an estate is not taxed.

For decedents dying in 2009 estate tax doesn't kick in until a gross estate of $3.5 million.

Phil
Rule Your Retirement Home Fool


You as always are right. I was assuming and didn't state that the expectation that he would live until at least 2011.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107721 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:22 AM
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With an objective of avoiding taxes, A is going to transfer 48 acres of developable land in Maryland to grandkid B for nothing, 1$ to make it a legal transfer.

My understanding is that the transfer would be "legal" even if it were for no money at all. However, that doesn't change the TAX implications, which is that an asset is being transferred to someone for far FAR less than market value.

A week or so later, they plan to make a private agreement among just the 2 of them, where B will pay A in cash $2000 a month for 15 years, amounting to $300,000 total.

Step transaction doctrine. IRS finds out this gets integrated into the previous transaction. And there's fraud, which is always fun.

- They know the basis for B will be zero.

Which makes it phenomenally stupid given their intended goal.

- I think family to family means paying no or a small transfer fee.

No, that's not the case. Only time it's the case is in a transfer to one's spouse. Related or not, it's either payment for services (income to recipient) or a gift. Doesn't matter if you give the property to your son or your garbageman.

(I'm using "your" in the general sense, as I understand YOU aren't doing this)

There's also potential GST tax issues with transfers to grandkids. In fact, they're taking something that would otherwise have almost no issues and totally screwing it up, for no good reason.

The objective is get the asset transferred before death to avoid inheritnce tax and avoid paying capital gains taxes as well. I know is it wrong and risky even for someone with patriotic limitations. Total estate oproior to this woul be ~ 1.4 million.

Then, with all due respect, they're paranoid morons. They're apparently too damn stupid or have convinced themselves that Obama's comin' to get 'em that they haven't bothered to look at the ACTUAL LAW. The current lifetime federal estate tax exemption is $3.5 MILLION, so there would be NO FEDERAL ESTATE TAX on an estate of 1.4 million, and assuming they don't intend to sell the lande before A dies, the heirs would take at a basis equal to Fair Market Value at the date of A's death. So, as Phil has already said:

are they so obsessed with sticking it to that Kenyan that they're willing to go to jail and/or pay huge fines? If A went to his dirt nap today there would be zero estate tax, and whoever inherited the property would inherit it with a basis equal to current fair market value. That translates into zero tax, but evidently that's not enough for, if I understand you correctly, these people who consider themselves patriots.

The only thing Phil left out of his response was "radical-islamist-commie-socialist-muslim-terrorist" in front of "Kenyan". :-)

Now, since this is land in Maryland, it would be subject to that state's estate taxes, which are 16% on the amount of the taxable estate over $1 million. So, IF A's entire estate (assuming that would be the taxable estate amount) of 1.4 million were subject to Maryland estate taxes, their total tax there would be $64,000 at A's death.

Now, if they want to avoid that, there ARE ways it could be done. Assuming A is not married (otherwise he could just effectively split the 1.4M between his and wife's taxable estates) he could start gifting 13K/year to his desired beneficiaries (C and D and possibly B if he wants), which would reduce his estate by 39K/yr. He could legitimately sell part of the land to B at the 2K/month for 15 years. Using the December 2009 Long term AFR of 4.09% (for monthly compounding), he could sell almost 270K of the land with no gift tax problems (but then B owns that part of the land, and A could not compel B to give some to C or D at A's death).

Another thing that could be done is that the land could be placed in a Limited Partnership or LLC. A could then gift or sell non-voting interests in that LP/LLC to B or C or D. Often, these non-voting interests are valued at a discount to the underlying assets held by the LP/LLC. However, this is more complicated and would require an appraisal (which would have to withstand IRS scrutiny if audited). In addition, there may be state law issues which would come into play (some states view such a transfer of real estate as triggering a reassessment for property tax purposes). The time, bother and potential expense of dealing with that may be more than A would want to tolerate to avoid a potential 64K state detah tax liability.

There are lots of things A could LEGITIMATELY do if he's THAT concerned about taxes, but it sounds like they just have “issues” about “the gummint” and “that Socialist Kenyan Obama” taking their stuff and “making them pay taxes”, so much so that they have no idea that there is no actual federal estate tax liability if they do nothing and A simply passes on. But if they really do want to do more involved estate planning or at least find out some info, they should actually talk to a knowledgeable tax attorney in their jurisdiction who can fill them in on the details. Maybe if you told them that no, they WOULDN’T owe federal estate taxes that will have some impact.

(Caveat – the federal estate tax as currently scheduled will go away entirely in 2010 but return in 2011 with a $1million exemption. However, nobody wants that. The Obama administration has publicly supported an extension of 2009 law, which is a 3.5 million lifetime exemption. I’m sure they’ll discount that as that Marxist Muslim saying one thing while secretly planning to take their guns and their property, but hey, it’s worth a try. If they want to commit tax fraud for absolutely no benefit and go to jail, no skin off my nose.)

-synchronicity

Circular 230 disclaimer - none of the above is tax advice and can not be used to avoid any penalties the IRS may impose. Please consult wiht an actual tax advisor rather than taking the word of some anonymous person what posts on the intermaweb

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107722 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:29 AM
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I was assuming and didn't state that the expectation that he would live until at least 2011.

By which time I think there will be additional changes to the estate tax. The good news for A is that if he dies next year there's no estate tax, IIRC, and by the end of 2010 the dust should settle on what the law will be going forward. Conventional wisdom says that it will be about $3 to 3.5 million, but we all know how conventional wisdom works out.

Phil
Rule Your Retirement Home Fool

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Author: katiewa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107723 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:53 AM
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A little over 2 decades ago, my husband's boss (at a government contracting corporation) was to be promoted to a more senior position. As part of the background check, it was discovered that boss owned a small engineering firm that sometimes contracted with boss's employer. Boss was told this was not allowed for the new position and boss would have to dispose of his interes. There was NEVER any indication of actual wrong-doing, abuse of position, unfair competition, etc. My husband is quite sure that his boss bent over backwards to ensure that he never gave his own company advantage over another.

Boss said, "No problem" and apparently disposed of his interest in the engineering firm. A few years later it was discovered that he had transferred his shares to his father, his father paid income tax (at a pretty low rate compared with boss's tax bracket) on the income from those shares, father gave income from shares to boss, who reimbursed father for income tax paid. Boss was NOT involved in day-to-day operations of the engineering firm, and allegedly stayed out of most decisions altogether.

Boss was fired from his very highly paid position (probably $100K++ in mid-80's plus excellent benefits plus bonuses plus being in line for an executive retirement package in another 8-10 years) and charged with tax fraud by the IRS. He did some prison time, in addition to fines, penalties, and back taxes. I seem to recall that the government contractor employer also charged him with something that resulted in his having to repay certain amounts. At some point in all this, his teenage son, an excellent student and athlete, nice looking, considered a "fine young man", accidently shot himself in their basement.

Boss was considered a great person to work for; a fine, upstanding member of the community; model family man; active leader in his church; etc. He lost everything because, in spite of what he had, he wanted more (The Fisherman and His Wife, http://www.pitt.edu/~dash/grimm019.html).

Your acquaintances appear to be on the verge of doing the same thing. If they want to be "patriotic", they should go oppose the laws openly and work to change them, not expect the rest of us to cover for them by paying additional taxes. And no whining about how "a little guy" can't do anything/be heard in our government: regardless of how they feel about Obama (or Clinton, Reagan, Carter, Ford, Nixon, Johnson, Truman...), he was not born into wealth or power.

If your acquaintances follow through on this stupidity, I hope they get found out.

Kathleen

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107725 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 11:52 AM
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I generally agree with what others have said, but would add a couple of points.

1. It looks like the total payments will actually be $360,000, and if that's the current market value, then after discounting the payments to present value, there will be a gift element but it won't be horrible.

2. This scheme won't reduce the taxable estate by $360,000. It will replace land, with a value of $300,000, for a land contract or installment note worth something close to that, or maybe less, depending on its terms. And the new asset isn't any more liquid than the land.

3. Since the payments will continue after the death of A, and be payable to C and D, let's just call it an installment sale. IRS recently adopted new regulations that basically eliminate the private annuity approach.

4. B's basis in the land won't be zero, even at the sham transaction of $1. It will be A's basis. And legally it will be what he pays for it.

5. The payments to C and D after A's death will be taxable to them as capital gains from an installment sale as "income in respect of a decedent." (IRD).

6. A is said to be in good health. He could live to be 95 and his estate will include the money from the sale. A sale like this is often called an "estate freeze" as it moves future appreciation from A to B. It might well be worth doing. And it can be done honestly, without a lot of pain involved.

There are too many parties involved to play games, for the amount of money involved, especially at LT capital gains rates.

Bill

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107728 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 2:39 PM
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or are they so obsessed with sticking it to that Kenyan that they're willing to go to jail and/or pay huge fines? If A went to his dirt nap today there would be zero estate tax, and whoever inherited the property would inherit it with a basis equal to current fair market value. That translates into zero tax, but evidently that's not enough for, if I understand you correctly, these people who consider themselves patriots.

Sheesh!



to be a little bit fair ..my Mom was much the same at the end. Didn't want to pay ONE dollar towards "Mr Bush's War"

wasn't too hard to dissuade her law-breaker schemes .. but the plans that saved on taxes by losing money...

maybe something about getting old -- you personalize things a lot more


=

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Author: CairnDad Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107734 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 6:05 PM
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+ I assume any attorney reviewing would warn the client they are committing a crime?
Any other view there? Is the attorney liable for allowing it to happen?


Does the attorney practice tax law?

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Author: susan400 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107735 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 9:28 PM
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Phil Thx very much- I concur completely.
susan

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Author: susan400 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107738 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:13 PM
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Bill, just to clarify.
I know about the annual gift exclusion 1ike 12,000/ yr or whatever it is now.

But as well, is there a a lifetime big # exclusion?

Or precisely, if someone gifts a 500,000$ piece of real estate,
are gift taxes due on ~489,000?

TIA susan

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107740 of 120829
Subject: Re: re post above estate tax avoidence Date: 11/19/2009 10:22 PM
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But as well, is there a a lifetime big # exclusion?

Or precisely, if someone gifts a 500,000$ piece of real estate,
are gift taxes due on ~489,000?

TIA susan


The gift tax lifetime exemption is 1M, but it is effectively tied to the estate tax lifetime exemption. Say you make a gift of 413K of real estate to one person. 13K is the annual exclusion, and your lifetime gift tax exemption is reduced by 400K. So you do not owe any gift taxes yet. However, your lifetime estate tax exemption is effectively reduced by that 400K. So when you die, your lifetime estate tax exemption is essentially reduced from 3.5M to 3.1M.

-synchronicity

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