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Old 02-22-2011, 03:53 PM   #141
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I am just doing this for discussion purposes... not to try and rile you up...


But, if you reinvest money back into the business.... either your basis has gone up and the cap gain would not be as much... OR, the money reinvested has not been taxed... so the first is investing money that has been taxed before putting it back in the business and your basis is higher, the second is with untaxed money and your cap gain would be higher...

The problem is the estate tax treats both the same... and taxes both the same...
Didn't rile me up. I have a headache but not riled.
And as you say..the problem is that the estate tax treats both the same.
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Old 02-22-2011, 04:04 PM   #142
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Well..I hear you on this but as an aside I think the lower rate on cap gains was initially an incentive for people to invest. If the money isn't invested the government get nothing.(might be where we are heading)

If people are going to be taxed at regular income rates they may not invest to the same extent..or will put most in tax free investments (before they do away with those too!) and the Federal government may actually get less in revenues.

It is certainly more of an incentive for us to keep 85% of investment gains than ....65% or 70% or whatever.
I understand that any tax is a disincentive to do something. A lower rate on labor income would be an incentive for people to get out of bed and go produce something useful. After all, if people don't work, the government gets nothing.

The market gives people an incentive to work and an incentive to save/invest. I don't see any reason to believe the market is wrong and needs to be "corrected" by such disparate tax rates.
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Old 02-22-2011, 05:12 PM   #143
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Didn't rile me up. I have a headache but not riled.
And as you say..the problem is that the estate tax treats both the same.


Good... I know it sounds like I am for the estate tax... but I really am not... I just see some points of view of some others on the other side...

To me (and believe me, it would be hard to do), taxing the untaxed income would be more 'fair'... that way, if your basis was $10 mill in an asset that was $10 mill, no tax due. If you basis was $0, then tax due on the $10 mill cap gain when you die...
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Old 02-22-2011, 07:49 PM   #144
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It seems that, as I suspected, nobody can offer a rational, moral justification for an estate tax. The best anyone seems to be able to offer is, "they're dead so they won't miss it, and it's not fair that their hiers get to inherit money, because I don't have any rich relatives."

I reiterate that it seems entirely rooted in envy. Every penny in the estate (save funds in tax-shelters like a 401(k)) has already been taxed. It's what's left after a lifetime of taxing and saving. What possible moral justification can be made to tax the whole pile again?
Maybe if you posted your "moral justification" for taxing labor income, capital income, retail sales, and real estate it would help the rest of us understand what you consider acceptable "moral justification".

Regarding "every penny ....", how does that comment reconcile with step up in basis?
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Old 02-22-2011, 08:42 PM   #145
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If you basis was $0, then tax due on the $10 mill cap gain when you die...
What?
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Old 02-22-2011, 09:36 PM   #146
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Wow... someone else beat me to the IRD... but I will not change my prior post...

You example of a home is not valid in that if the person bought the home for $400K and it is now worth $200K... he will not have gotten his money out of the house.... the outcome is still bad in that there was a $200K loss that can not be deducted... the estate tax did not change this transaction....

Nobody was wiped out.... they might not have gotten the person's whole estate, but they got something they did not have prior to the death of the person... even if it was smaller than the person had...
Well...we may be beating this to death. What is difficult is to get all the nuances into one post. Going back to my original thoughts when posting along these lines...is...often the wealth of family businesses and/or generational farms is tied up in the hard assets. The wealth may not liquid. The government wants liquid money.
Another point is that it often is only the first generation that has the primary wealth. As the family business is inherited thru the 2nd and 3rd generations...that wealth is diluted.
Often you end up with shareholders that do not have the liquid means to pay the tax ....so the business must be sold. They may or may not be wiped out...it really depends on the situation. I do know of family businesses that sold and turned most of the proceeds over to the IRS.
My point...is somewhat similar to part of the health care debate. People think it a travesty that anyone in the U.S. loose their house or go bankrupt to pay for health care. The same thing can happen in family businesses and farms...to pay the tax man. With the exemption now at 5 million it will not happen like before but....who knows what the exclusion will be going forward. Hey...that's what we need for health care.!!! A lifetime exclusion!!!!
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Old 02-22-2011, 11:40 PM   #147
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Going back to my original thoughts when posting along these lines...is...often the wealth of family businesses and/or generational farms is tied up in the hard assets. The wealth may not liquid. The government wants liquid money.
!!
I thought that Section 6166 was expressly designed to allow an operating business to defer estate taxes, but I'm not very familiar with the issue.

United States Code: Title 26,6166. Extension of time for payment of estate tax where estate consists largely of interest in closely held business | LII / Legal Information Institute
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Old 02-23-2011, 07:30 AM   #148
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Originally Posted by Texas Proud
If you basis was $0, then tax due on the $10 mill cap gain when you die...
What?
LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!
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Old 02-23-2011, 08:14 AM   #149
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I thought that Section 6166 was expressly designed to allow an operating business to defer estate taxes, but I'm not very familiar with the issue.

United States Code: Title 26,6166. Extension of time for payment of estate tax where estate consists largely of interest in closely held business | LII / Legal Information Institute
Independent....the executor or trustee if that be the case can elect to pay it out over a certain number of years. But...in our case, the accountants advised against it. One has to obtain a surety bond or security against the debt. There are also guidelines regarding ownership percentages in relation to the overall gross estate. This may work well for first generation owners who own 100% but not so well for 2nd and 3rd generation who may own fractional percentages. Maybe Texasproud can shed some additional light on this.
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Old 02-23-2011, 08:16 AM   #150
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LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!
I want in that deal!
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Old 02-23-2011, 08:20 AM   #151
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LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!
Actually, it is the basis for the phrase "I started out with nothing, still have most of it left"
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Old 02-23-2011, 09:07 AM   #152
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What?

I was giving an alternative to the estate tax... let's just tax the deferred income of the deceased and leave it at that... so if you had a basis of $0 in an asset that was worth $10 mill, you have a $10 mill cap gain to pay taxes...

It will never get off the ground...
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Old 02-23-2011, 09:12 AM   #153
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LOL, I missed this the first time! But now that Greg's pointed it out, I'm also very, very interested in how to turn $0 into $10 million. Turning $1 into $10 million is certainly very impressive, but $0? That's just amazing! That's some pretty incredible compounding!

You can have a zero basis in a Sub S corp (or for that matter in other assets)... Say you buy Sub S corp shares on the cheap... and you get distribution in excess of income... that distribution reduces your basis... and it can reduce it to zero....

The strangest I saw when I did taxes was a family partnership... it was establised in the 1800s... they sold land for $15 million and the partnership had a basis of $20,000...
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Old 02-23-2011, 09:18 AM   #154
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Well...we may be beating this to death. What is difficult is to get all the nuances into one post. Going back to my original thoughts when posting along these lines...is...often the wealth of family businesses and/or generational farms is tied up in the hard assets. The wealth may not liquid. The government wants liquid money.
Another point is that it often is only the first generation that has the primary wealth. As the family business is inherited thru the 2nd and 3rd generations...that wealth is diluted.
Often you end up with shareholders that do not have the liquid means to pay the tax ....so the business must be sold. They may or may not be wiped out...it really depends on the situation. I do know of family businesses that sold and turned most of the proceeds over to the IRS.
My point...is somewhat similar to part of the health care debate. People think it a travesty that anyone in the U.S. loose their house or go bankrupt to pay for health care. The same thing can happen in family businesses and farms...to pay the tax man. With the exemption now at 5 million it will not happen like before but....who knows what the exclusion will be going forward. Hey...that's what we need for health care.!!! A lifetime exclusion!!!!

I am not trying to beat the dead horse... but by the simple math they can not be wiped out.... the exclusion is now $5 mill... there is no way someone that has an estate greater than $5 mill can get less than $5 mill... (well, I guess with the 401(k) issue they could, but we are talking about farms and businesses)....

Even back in the day, someone could not get less than $600K... plus at least half of the rest of the estate...


One other comment... it is the estate that has to pay the tax... so the kids etc. only get what is left... sure, the result is the same, but in a way it does matter who is paying what... it is incumbent on the person who is planning for their estate to take into account this tax that will be due... failure to do so can be costly...
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Old 02-23-2011, 09:39 AM   #155
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Independent....the executor or trustee if that be the case can elect to pay it out over a certain number of years. But...in our case, the accountants advised against it. One has to obtain a surety bond or security against the debt. There are also guidelines regarding ownership percentages in relation to the overall gross estate. This may work well for first generation owners who own 100% but not so well for 2nd and 3rd generation who may own fractional percentages. Maybe Texasproud can shed some additional light on this.
I see a requirement that the value of the business is at least 35% of the value of the entire estate. So you're saying that you were in a situation where the business value was 30% of the entire estate, but there wasn't sufficient liquidity in the other 70% to pay the estate tax, which was only __% of the gross estate?

Or maybe you're saying the deceased only owned 15% of the entire business, so the whole deferral idea didn't apply because the business was no longer "closely held"?
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Old 02-23-2011, 02:08 PM   #156
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I see a requirement that the value of the business is at least 35% of the value of the entire estate. So you're saying that you were in a situation where the business value was 30% of the entire estate, but there wasn't sufficient liquidity in the other 70% to pay the estate tax, which was only __% of the gross estate?

Or maybe you're saying the deceased only owned 15% of the entire business, so the whole deferral idea didn't apply because the business was no longer "closely held"?
I'm not saying that happened to us. What I am saying is that it can happen and the other 70% or so may be made up of hard assets that are difficult to sell, sold under fire sale conditions...etc.
To my knowledge...closely held still applies even if it is 15 % or less. I'd have to look up the IRS definition for closely held...but am assuming.."still held within the family is closely held" regardless of 5%, 10%..etc.)

I was also inferring that the tax election to defer estate taxes over a number of years is probably "more applicable" when the decedent owns 50 to 100% of the stock or the stock value in the estate makes up more than 50% of the gross estate...and/or there is no or vey little liquidity to pay the estate tax up front. The IRS was allowing for just this situation.

Texasprouds point is well taken in that the exemption amount now is 5 million. But that has been a fairly recent increase. It was not in affect when my parents passed away or the last 10 plus years which did affect a lot of family businesses and generational farms. I
I haven't talked a lot of specifics regarding my family business because we ended up o.k. but the IRS got well over a million on the estate tax issue. For the record, our family business is 56 years old with some now 3rd generation owners.
I see potential pitfalls...waiting for some in the 2nd generation(who haven't saved) and the 3rd generation...IF Congress decreases the exemption.
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Old 02-23-2011, 02:14 PM   #157
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I am not trying to beat the dead horse... but by the simple math they can not be wiped out.... the exclusion is now $5 mill... there is no way someone that has an estate greater than $5 mill can get less than $5 mill... (well, I guess with the 401(k) issue they could, but we are talking about farms and businesses)....

Even back in the day, someone could not get less than $600K... plus at least half of the rest of the estate...


One other comment... it is the estate that has to pay the tax... so the kids etc. only get what is left... sure, the result is the same, but in a way it does matter who is paying what... it is incumbent on the person who is planning for their estate to take into account this tax that will be due... failure to do so can be costly...
Your definition of wiped out is not the same as mine (joking!!)
But I suppose my view is more in line when the exemption amount was not 5 million....since things did not happen in our family business when it was.

But I get your point going forward with the now 5 million exemption.
Problem is ...is that it can be reduced ...by Congress at any time...meaning it is not a given.
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Old 02-23-2011, 05:19 PM   #158
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I'm not saying that happened to us. What I am saying is that it can happen and the other 70% or so may be made up of hard assets that are difficult to sell, sold under fire sale conditions...etc.
To my knowledge...closely held still applies even if it is 15 % or less. I'd have to look up the IRS definition for closely held...but am assuming.."still held within the family is closely held" regardless of 5%, 10%..etc.)

I was also inferring that the tax election to defer estate taxes over a number of years is probably "more applicable" when the decedent owns 50 to 100% of the stock or the stock value in the estate makes up more than 50% of the gross estate...and/or there is no or vey little liquidity to pay the estate tax up front. The IRS was allowing for just this situation.

(
I guess the claim is that "many" family businesses have to be broken up due to the estate tax. I think lots of voters wouldn't like to see a situation where a family business is lost because the entrepreneur who spent a lifetime building a business didn't spend much time thinking about liquidity for estate taxes. Reading the reg, it seems that current law makes reasonable allowances for that situation.

Now, after the founder dies, and eventually the founder's children start dying, and the business ownership has been spread among a lot of people, it looks like somebody needs to plan for the taxes. That doesn't seem unreasonable to me.
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Old 02-23-2011, 08:58 PM   #159
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I agree kombat. What a person has built up after decades of work and toil they have been taxed on many times over. So why should it be taxed again...just because that person dies.? That gross estate should be considered net of tax money/assets. When one really thinks about this....there is no justification moral or otherwise....other than the government wants the money.
Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.
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Old 02-23-2011, 10:16 PM   #160
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Isn't it the same as the justification for all taxes? the government needs a certain amount of money to maintain society/ the country. That money has to come from it's citizens and necessarily from those who have an ability to pay. People receive a large inheritence obviously have the ability to pay taxes on that windfall.
I suppose as this thread shows...there is an argument either way. For now that is how the government views it. But you have to admit.(or not) ..taking taxes from a live person to support society is a bit different than taking it from a dead person.
Put another way....he or she certainly isn't enjoying society anymore.

Alas...it is the system we have....so...
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