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Old 05-24-2013, 11:57 AM   #21
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4. Set up will/trusts to bequest your estate to your spouse and vice versa. This allows your estate to pass to your spouse tax free. I was told this effectively doubles the exemption, but I am not sure how since when 2nd to die passes, then the tax over their single exemption is taxed, unless they spend the estate down to under the exemption (so doesn't this just defer the estate tax vs double the exemption?--perhaps someone can explain the characteristic benefits of this strategy to me/others?)
Sounds like you are describing a spousal A/B trust. The easiest way to think of it is such a trust persists after the first person of the couple dies. The survivor does not own the deceased spouse's trust, he/she is only the trustee of it, and thus when the survivor also dies that trust is not considered part of his/her taxable estate.

It would be fantastic if tax law simply allowed spousal estates to be treated separately in this manner, thus removing the need for all the paperwork associated with forming and maintaining a trust.
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Old 05-24-2013, 12:14 PM   #22
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Or you can keep your real estate rentals and let those who inherit them after you're gone deal with it. The tax basis resets, so there's no depreciation to recover.

But the issue for all of us with investment property is dealing with it becomes more like w*rk as time goes by. One possibility is to form or join a partnership where all the sale proceeds could be transferred via 1031 exchange into a large purchase. Then the partnership hires a management company to deal with the day to day problems. When you die, your heir(s) simply sells at a new tax basis and avoids the depreciation recovery.
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Old 05-24-2013, 02:05 PM   #23
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10. Re tax free munis--I recently read about these can be NOT tax free if the AMT kicks in for you. I did get subject to AMT last couple years. Not really sure if I will in future years, and it scares me to think what I bought as a tax free investment turns out not to be if AMT kicks in. That is, I have bought a lower bond yield than , corporates offer to get the higher yield of munis when tax advantages are considered, only to find out the AMT robs me of the tax advantages and leaves me with the lower than corp, muni yield. Any ideas on how I should think about this/act?
-Allan
I don't believe that's quite how it works.......I think muni interest may(or may not) have an AMT component to it. If you are not in AMT, there is no problem. If you are in AMT, that AMT component is taxed (not the rest of it). To minimize your pain, look for munis w/ small or no AMT components
(assuming you're in a fund w/ a mix of stuff; if you own single bonds, it might be all subject to AMT (or not).
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Old 05-24-2013, 02:12 PM   #24
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Sounds like you are describing a spousal A/B trust. The easiest way to think of it is such a trust persists after the first person of the couple dies. The survivor does not own the deceased spouse's trust, he/she is only the trustee of it, and thus when the survivor also dies that trust is not considered part of his/her taxable estate.

It would be fantastic if tax law simply allowed spousal estates to be treated separately in this manner, thus removing the need for all the paperwork associated with forming and maintaining a trust.
For the last few yrs, the new law has basically allowed your fantasy.....and more..........the survivor gets to control the whole thing if desired and gets to use the whole double exemption (what's left of it)
see portability here Federal Gift and Estate Law in 2013 and Beyond | Nolo.com

Note the critical part is that survivor must file estate tax return even if nothing is due.
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Old 05-24-2013, 04:09 PM   #25
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I don't believe that's quite how it works.......I think muni interest may(or may not) have an AMT component to it. If you are not in AMT, there is no problem. If you are in AMT, that AMT component is taxed (not the rest of it). To minimize your pain, look for munis w/ small or no AMT components
(assuming you're in a fund w/ a mix of stuff; if you own single bonds, it might be all subject to AMT (or not).
I agree. This is what happened to me in 2008 when I received a large company stock payout as part of my ER. On my statements of tax-exempt income (for the muni bond funds), there was always an amount of income subject to the AMT, amounts I had always ignored prior to 2008. But that year I had to include them when I completed the AMT form. The amounts were not very large as a percentage of the overall tax-exempt income but it did erode the overall after-tax return of the muni bond fund a little bit.
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Old 05-24-2013, 04:37 PM   #26
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While I'm interested in not paying any more taxes than necessary, I'm also not stressing over it. As I told my mother this year when I finished her tax return, since the money she is spending now wasn't taxed when her husband earned it, nor was the growth taxed, she's just paying taxes now that they didn't have to pay back then. She was much happier once she understood that.
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Old 05-24-2013, 10:37 PM   #27
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indeed you are correct
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Old 05-24-2013, 10:40 PM   #28
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Sounds like you are describing a spousal A/B trust. The easiest way to think of it is such a trust persists after the first person of the couple dies. The survivor does not own the deceased spouse's trust, he/she is only the trustee of it, and thus when the survivor also dies that trust is not considered part of his/her taxable estate.

It would be fantastic if tax law simply allowed spousal estates to be treated separately in this manner, thus removing the need for all the paperwork associated with forming and maintaining a trust.
You mentioned "maintaining" a trust...what are the maintenance considerations? You were right I was talking about and AB trust and your answer helps clarify it for me. Thx
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Old 05-25-2013, 06:30 AM   #29
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My folks have such trusts. Once set up, maintenance is minimal in my experience. My dad passed and mom is his trust's sole beneficiary. Mom, sis and I are co-trustees. I just do a trust tax return and K-1 each year. An hour or so a year once you've done it. Easy.
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Old 05-25-2013, 07:47 AM   #30
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While I'm interested in not paying any more taxes than necessary, I'm also not stressing over it. As I told my mother this year when I finished her tax return, since the money she is spending now wasn't taxed when her husband earned it, nor was the growth taxed, she's just paying taxes now that they didn't have to pay back then. She was much happier once she understood that.
Very true. Deferring taxes for decades is a good thing, and it is better to have taxable income than no income.
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Old 05-26-2013, 09:31 PM   #31
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You should only convert now if you expect to be in a higher tax bracket later.

For example, if RMD's at age 70.5 are going to push you into a higher tax bracket then you can lower the value of your IRA's by converting some to ROTH now in order to lower the RMD's.

This is my situation and I will probably start conversions this year. That gives me about 8 years to reduce my traditional IRA values before RMD's kick-in. Still crunching numbers to decide how much to convert each year, given current tax rates.
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