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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: of 121102  
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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