Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 01-30-2021, 07:51 PM   #21
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,596
Quote:
Originally Posted by cathy63 View Post
My understanding from this is that the BEA used for tax calcs will be the maximum of the BEA in effect when the taxpayer dies or the amount previously sheltered legally. So, suppose the BEA in 2026 is $5M. For a single person who has given away $8M in 2024 and dies with $4M in 2026, the estate's BEA will be $8M; but all of that has already been used by the previous gift. Therefore, the estate owes taxes on $4M.
Emphasis added.

That's sort of the point I was wondering about.

I was hoping that the earlier gift (of $8M or $2M) were sheltered as avoiding gift taxes because they were under the BEA at the time. They were also exempt from estate taxes because they would have been out of the estate. Then the remaining $4M was sheltered from estate taxes because they were under the anti-claw back BEA (of $8M or $5M) at that later time. The latter amount would have been exempt from gift tax because it was not gifted.

I know that the gift taxes and estate taxes are unified, but I didn't know how unified they were and how this claw back rule works. I've tried reading all of the links but they're not very precisely written and none of the examples apply to the situation that I'm curious about (which is in the vein of the second example on this thread).
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-30-2021, 11:15 PM   #22
Thinks s/he gets paid by the post
 
Join Date: Mar 2013
Location: Coronado
Posts: 2,506
Quote:
Originally Posted by SecondCor521 View Post
Emphasis added.

That's sort of the point I was wondering about.

I was hoping that the earlier gift (of $8M or $2M) were sheltered as avoiding gift taxes because they were under the BEA at the time. They were also exempt from estate taxes because they would have been out of the estate. Then the remaining $4M was sheltered from estate taxes because they were under the anti-claw back BEA (of $8M or $5M) at that later time. The latter amount would have been exempt from gift tax because it was not gifted.

I know that the gift taxes and estate taxes are unified, but I didn't know how unified they were and how this claw back rule works. I've tried reading all of the links but they're not very precisely written and none of the examples apply to the situation that I'm curious about (which is in the vein of the second example on this thread).
The way Form 706 works is roughly*:
1) Add the net estate value and all prior taxable gifts
2) Calculate the estate tax on that entire amount and subtract any gift taxes paid in prior years = $X
3) Determine the exclusion amount
4) Calculate the estate tax on the exclusion = $Y
5) If $X > $Y, then tax owed is $X - $Y, else tax owed is $0.

I think we might be making things more confusing by worrying about what's sheltered and what's in or out of the estate. In order to calculate the estate tax, you always have to include all the gifts that were (or should have been) reported on gift tax returns while the decedent was alive, and that shouldn't change in the future.

The real question is how will the IRS determine the exclusion amount in future years. I agree that it's not entirely clear, but the way I read the rules that have been issued so far, I think BEA will have to be calculated from the decedent's prior gift tax returns rather than just looked up in a table based on the year of death, as it is now. What I understand is that if you've given away more than whatever is the current BEA when you die, but the cumulative amount was always at or below the BEA for each year during which you made gifts, then your personal BEA will be actual amount you gave away.

So for the examples you gave earlier:
- where the decedent gave away $8M in 2024 and he dies in 2026 with $4M while the default BEA is $5M, the decedent's BEA will be $8M. The executor will fill out form 706 and calculate the tax on $12M and subtract the tax on $8M (mathematically it's the same as just calculating the tax on $4M), which is $1.6M.
- where the decedent gave away $2M in 2024 and he dies in 2026 with $4M while the default BEA is $5M, the decedent's BEA will be $5M. In this case, the tax is .4 * ($4M + $2M - $5M) = $400K

The "no clawback rule" just means that the BEA for the first example won't be limited to $5M.


*There are rules about property transferred shortly before death, deductions for state and foreign estate taxes, charitable bequests, spouse's unused exemptions, split gifts, etc, etc, but let's just ignore all of those for now.
cathy63 is offline   Reply With Quote
Old 01-31-2021, 07:16 AM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 11,149
^^
That's how I read it too. The idea is that they won't claw back estate taxes if you exceeded the current estate exemption but at the time of the gifts it was under the exemption at the time. That's all.

What they aren't covering is any notion of shielding anything extra when you previously made some taxable gifts under a larger exemption, but those gifts do not exceed the current exemption.
RunningBum is offline   Reply With Quote
Old 01-31-2021, 07:19 AM   #24
Thinks s/he gets paid by the post
 
Join Date: Aug 2016
Location: Northern Virginia
Posts: 3,326
It does seem to be a fair approach.
Montecfo is offline   Reply With Quote
Old 01-31-2021, 01:09 PM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,596
Thanks for all the replies and comments.

I have great respect for @cathy63's knowledge and have seen at least one professional article somewhere supporting her description in post #22.

I'm not concerned with notions of fairness (post #24). At the moment I'm concerned with understanding the rules in order to help implement the best strategy for the situation I'm familiar with.

The takeaways I have at the moment, assuming post #22 is accurate:

1. While the rule is written simply and is therefore just a rule, the effects in its implementation vary conceptually: the $8M More Aggressive Gifter (MAG) is effectively taxed on their "leftover estate" of $4M and not at all on their earlier gifting whereas the $2M Less Aggressive Gifter (LAG) is effectively taxed on their "total starting estate" of $6M.

2. The LAG really has very little incentive to take advantage of the currently higher exclusion amount. They get taxed on $6M whether they gift or not (well, except any gains on their earlier gifting does end up in the recipient's estate, so I guess there is that), and gifting earlier just may raise concerns in their mind of keeping enough for themselves.

3. The MAG benefits, but not as much as it may first appear. For giving away $8M, they only grow their BEA by $3M (because they'd get the $5M BEA anyway if they did nothing).

@cathy63, do you know if these new rule modifications are embodied in the current estate tax instructions somewhere? And if so, specifically where? I'm going to go look, but I'm not very familiar with the document and it's easy to overlook or miss things of this nature.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 01-31-2021, 03:48 PM   #26
Thinks s/he gets paid by the post
 
Join Date: Mar 2013
Location: Coronado
Posts: 2,506
Quote:
Originally Posted by SecondCor521 View Post
Thanks for all the replies and comments.

I have great respect for @cathy63's knowledge and have seen at least one professional article somewhere supporting her description in post #22.

I'm not concerned with notions of fairness (post #24). At the moment I'm concerned with understanding the rules in order to help implement the best strategy for the situation I'm familiar with.

The takeaways I have at the moment, assuming post #22 is accurate:

1. While the rule is written simply and is therefore just a rule, the effects in its implementation vary conceptually: the $8M More Aggressive Gifter (MAG) is effectively taxed on their "leftover estate" of $4M and not at all on their earlier gifting whereas the $2M Less Aggressive Gifter (LAG) is effectively taxed on their "total starting estate" of $6M.

2. The LAG really has very little incentive to take advantage of the currently higher exclusion amount. They get taxed on $6M whether they gift or not (well, except any gains on their earlier gifting does end up in the recipient's estate, so I guess there is that), and gifting earlier just may raise concerns in their mind of keeping enough for themselves.

3. The MAG benefits, but not as much as it may first appear. For giving away $8M, they only grow their BEA by $3M (because they'd get the $5M BEA anyway if they did nothing).

@cathy63, do you know if these new rule modifications are embodied in the current estate tax instructions somewhere? And if so, specifically where? I'm going to go look, but I'm not very familiar with the document and it's easy to overlook or miss things of this nature.

Right. The only way you can benefit from the current temporary higher exclusion amount (without actually dying) is to give away more than the exclusion amount will be when you die. If you can't do that, then your estate will end up in the same position it would have been in if there had never been a temporary increase.

As for estate tax instructions, I don't think the form and instructions will be updated until 2026. Until then, the only thing we have would be the examples in the tax code: https://www.law.cornell.edu/cfr/text/26/20.2010-1
cathy63 is offline   Reply With Quote
Old 02-01-2021, 08:04 AM   #27
Thinks s/he gets paid by the post
 
Join Date: Nov 2005
Posts: 1,389
Quote:
Originally Posted by SecondCor521 View Post
I am interested in what your magic 8-ball says about the estate tax exemption amount over the next five years.
...
I am particularly interested in ... whether people think the "Making large gifts now won’t harm estates after 2025" paradigm will continue to remain in place or will be eliminated.
I will be helping someone revise their estate planning documents later this year. I always create a spreadsheet so the person can see how their cash might flow during estate settlement. I will be assuming (1) a maximum lifetime gift exemption of $1M and (2) a 50% gift tax rate. This assumption is not (1) a prediction of the policy that might be in place when the person dies, or (2) a personal preference. Instead, this is merely the type of cautious position I like to take when budgeting.

I'm not worried about the future implementation of a clawback procedure where a person gifts under a generous lifetime gift exemption policy that is later reduced. Why? Well, what would happen if a particular estate doesn't have sufficient assets to pay the clawback taxes? This could happen if someone decides to give away most of their assets during their lifetime and live off the income from an irrevocable trust, for example (I'm not claiming this is a good idea; it's just a possibility).

I'm not an expert in these matters so YMMV.
socca is offline   Reply With Quote
Old 02-01-2021, 10:15 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 5,596
At this point I think I'm back to recommending annual gifting below the $15K limit to kids and grandkids each year in the case I'm helping with. Possibly also paying for some college for some of the grandkids, since that is also exempt from the unified gift/estate tax. Maybe chat with a good estate planning attorney, but those folks often think everything looks like a nail for their attorney hammers.

What is frustrating is that the estate tax law can change faster than a person can respond. A person who is a few million over the exemption amount has to either (a) try not to die at an inopportune time, (b) try to anticipate the changes and gift for years ahead of time to manage the exposure, (c) implement more costly tax avoidance strategies (fancy trusts like GRATs), or (d) give up and just pay the tax.

Ah well, #firstworldproblems I suppose.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Reply

Tags
8-ball, crowds, estate, exemption, tax


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Homestead Exemption/real estate tax relief msefren FIRE and Money 14 09-18-2016 02:56 PM
What was your magic Number? Was : Survey finds $880,000 is magic number eta2020 FIRE and Money 107 05-04-2015 04:58 PM
Magic 8 Ball App! Midpack Other topics 1 08-16-2012 08:27 AM
Any guesses why we fall every afternoon? Art G FIRE and Money 20 10-31-2008 04:45 AM
Magic mushrooms are magic Martha Other topics 40 07-18-2006 04:32 PM

» Quick Links

 
All times are GMT -6. The time now is 01:40 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.