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Estate vs Gift Taxes
Old 09-23-2010, 02:06 PM   #1
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Estate vs Gift Taxes

I've been researching estate and gift taxes and I'm a little confused. Maybe some of my more learned members can help me out.

Is there any overlap/conflict between Estate Tax Exemptions and the life time Gift Tax Exemption?

For example letís say that nothing in the current tax laws change. Therefore my understanding is that in 2011 the Estate Tax Exemption will be $1 mil. And, everyone has a lifetime gift exemption of $1 mil (over and above the annual $13k per person per year).

So, let say that next year, Old Codger (OC) has $2 mil in assets and he wants to leave it all to Pretty Young Thing (PYT) Ė and avoid taxes of course. But he doesnít want to part with any of his money until he dies. He may need it.

Well, OC finds out, in January 2011, that he has 6 months to live. He knows heís not going to need all his assets much longer. So he gifts PYT $1 mil. Since heís never given away any of his assets before, the gift is under the lifetime gift exemption and is therefore not taxable for either party Ė right?

Then 6 months later OC kicks the bucket. His will leaves everything to PYT. His estate is now worth the remaining $1 mil and since itís under the Estate Tax Exemption amount they both avoid taxes on that amount as well.

So, PYT ends up getting all OCís $2 mil in assets without paying Uncle Sam any taxes.

Can this be right?
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Old 09-23-2010, 02:16 PM   #2
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gift tax exclusion is not in addition to estate tax exclusion.
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Old 09-23-2010, 02:19 PM   #3
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But he doesnít want to part with any of his money until he dies. He may need it.
Everything you mentioned sounds ok except for this. PYT is the owner once you gift her 1 mil, then can leave a millionaire at this point!
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Old 09-23-2010, 02:21 PM   #4
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In your example, since he gifted within 3 yrs, the gift is added back to estate. I wasn't totally correct in my response, gifts that exceed the annual exclusion amt are added to estate exclusion amt at death.

Invest FAQ: Tax Code: Estate and Gift Tax
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Old 09-23-2010, 03:02 PM   #5
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i think they can go back even further than the standard 3 or 5 years, if they are suspicious.

maybe an irrevocable trust could work? still, signing over the rights of your cash to someone else...
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Old 09-23-2010, 03:40 PM   #6
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If you utilize TOD or POD on your accounts, this bypasses probate assets. I just finished going through court on this topic (final status was today, hopefully). There was a sizable stock portfolio passed via TOD and this wasn't included in the estate because it was defined as a TOD. There was a challenge by one of the siblings, but it failed and wasn't included in court. If you title it in your name, you have full control until your passing, then control goes to the named person on the TOD designation.
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Old 09-23-2010, 04:46 PM   #7
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My opinion - I believe the estate tax exemption and the gift tax exemption are the same tax. So in your example the final $1 million would all be subject to the estate/gift tax. You have a $1 million lifetime bucket as of next year with no law changes. Yearly gift exclutions are currently $13k per person (2010) (You can give $26k to each person if married). Anything above those amounts to anyone and you have to fill out a gift tax return for that year and the amount OVER the exclusion you can pay taxes on or make it count toward your $1 million lifetime exemption. If you are married a attorney can double your exemption with a "marital bypass trust" (This has a few different names)

I am no lawyer and this is not legal advice only a opinion.
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Old 09-23-2010, 08:49 PM   #8
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Just my 2 cents. Anyone with enough money to cause a concern in this area should seek professional advice. I took one class on estate and gift tax in college way back when. This was just enough to teach me how complex this issue can be and how mistakes can be very costly.
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Old 09-23-2010, 08:54 PM   #9
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You might google "unified credit". I'm thinking the word "unified" means something here.
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Old 09-23-2010, 09:16 PM   #10
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Originally Posted by Dimsumkid View Post
If you utilize TOD or POD on your accounts, this bypasses probate assets. I just finished going through court on this topic (final status was today, hopefully). There was a sizable stock portfolio passed via TOD and this wasn't included in the estate because it was defined as a TOD. There was a challenge by one of the siblings, but it failed and wasn't included in court. If you title it in your name, you have full control until your passing, then control goes to the named person on the TOD designation.

This has nothing to do with the estate taxes... all of the assets should be included in the tax return filed with the IRS... even if passed TOD... most people confuse probate with the estate taxes...
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Old 09-23-2010, 09:17 PM   #11
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In your example, since he gifted within 3 yrs, the gift is added back to estate. I wasn't totally correct in my response, gifts that exceed the annual exclusion amt are added to estate exclusion amt at death.

Invest FAQ: Tax Code: Estate and Gift Tax

I am trying to get to your example, but it is not loading.... but I think your first statement was correct... the exclusion is $1 million for estates AND gifts... if you use all your exclusion on gifts you do not have any left when you die...



OK... read the article and what that is talking about does not change that the credit is for both gift and estates...

"The term "unified credit" is used because the credit is the "unified gift/estate tax credit.""


But, if you gave away $1 million and used up your credit on that gift... and then die within the three year... that gift is added back to the estate at the HIGHER MARGINAL TAX RATE... IOW, you had thought you had given a gift and used the low rates for the beginning of the gift... and used up your credits... but now the whole estate is recalculated and the $1 mill is at the 55% (or whatever it is now).... so you pay more estate taxes... you still get to use your credit, but overall you pay more tax


"Another exception to these rules is the treatment of gifts made within three years of a person's death. Generally, gifts made within three years on one's death must be included in the gross estate for tax purposes. These gifts are said to be "lapsed back" into the estate, and can thereby affect the amount of tax due on the estate."
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Old 09-23-2010, 09:56 PM   #12
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Texas Proud,
You're right, been buried in a probate battle for so long, we ignored the estate tax part since we weren't close to hitting the threshold.

Seems to me the easiest solution is to get married and have all assets in joint ownership w/rights of survivorship. Then only 50% is included in the estate and no estate tax to pay.
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Old 09-24-2010, 06:47 PM   #13
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Texas Proud,
You're right, been buried in a probate battle for so long, we ignored the estate tax part since we weren't close to hitting the threshold.

Seems to me the easiest solution is to get married and have all assets in joint ownership w/rights of survivorship. Then only 50% is included in the estate and no estate tax to pay.

Unless both spouses are killed at the same time... you know, car accident or such...
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Old 09-24-2010, 06:55 PM   #14
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Unless both spouses are killed at the same time... you know, car accident or such...

Did I miss something? Both spouses? All he wanted to do was avoid the estate tax situation and just leave it to PYT.
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Old 09-24-2010, 06:58 PM   #15
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Quote:
Originally Posted by moguls View Post
I've been researching estate and gift taxes and I'm a little confused. Maybe some of my more learned members can help me out.

Is there any overlap/conflict between Estate Tax Exemptions and the life time Gift Tax Exemption?

For example letís say that nothing in the current tax laws change. Therefore my understanding is that in 2011 the Estate Tax Exemption will be $1 mil. And, everyone has a lifetime gift exemption of $1 mil (over and above the annual $13k per person per year).

So, let say that next year, Old Codger (OC) has $2 mil in assets and he wants to leave it all to Pretty Young Thing (PYT) Ė and avoid taxes of course. But he doesnít want to part with any of his money until he dies. He may need it.

Well, OC finds out, in January 2011, that he has 6 months to live. He knows heís not going to need all his assets much longer. So he gifts PYT $1 mil. Since heís never given away any of his assets before, the gift is under the lifetime gift exemption and is therefore not taxable for either party Ė right?

Then 6 months later OC kicks the bucket. His will leaves everything to PYT. His estate is now worth the remaining $1 mil and since itís under the Estate Tax Exemption amount they both avoid taxes on that amount as well.

So, PYT ends up getting all OCís $2 mil in assets without paying Uncle Sam any taxes.

Can this be right?
No.
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Old 09-24-2010, 07:00 PM   #16
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Originally Posted by Dimsumkid View Post
If you utilize TOD or POD on your accounts, this bypasses probate assets. I just finished going through court on this topic (final status was today, hopefully). There was a sizable stock portfolio passed via TOD and this wasn't included in the estate because it was defined as a TOD. There was a challenge by one of the siblings, but it failed and wasn't included in court. If you title it in your name, you have full control until your passing, then control goes to the named person on the TOD designation.
Probate rules and estate tax rules are two entirely different games with different rules. Just because something doesn't go through probate doesn't mean it won't be counted when determining if estate tax is owed.
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Old 09-25-2010, 12:17 AM   #17
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Did I miss something? Both spouses? All he wanted to do was avoid the estate tax situation and just leave it to PYT.
I was just responding to your post, not the original...

But my answer also applies to PYT... if she is in the car and dies because he crashes.... it does not matter to her does it
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