Re: how to compare living standards

On Tue, 18 Apr 2006 09:54:34 -0500, "Jim Blair" <jeb@xxxxxxxx> wrote:

"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message

The amount of estate and gift tax collected in 2005 was $24.7 billion
according to http://www.fms.treas.gov/fr/05frusg/05stmt.pdf. So your
figure on revenue is correct. I don't think anyone knows how much is
passed from parents to their offspring at time of death. Any figure
is a rough estimate at best. Remember, no filing is required on
estates whose value falls below the exemption limit.

The gift tax exemption in 2005 was $1.5 million. Thus if both parents
died in 2005, there would be no tax on an estate worth $3.0 million or
less. But if the estate were worth $5.0 million, for example, the tax
would be $555,800, or about 11.1% of its total value.

I suspect that there is more to this. The letter I read last night from
TIAA/CREF informing me of my options for my IRA distribution cautioned me
that if I designate a person (like my wife) as the beneficiary, and I die,
the total tax rate on my estate might be as high as 80%. So I should
consult with an estate planner before I decide, but it indicated that a
trust would likely be a better choice. I note here that my estate including
the IRA is well below your $5million example, and the information on options
was not specific to me but was in a general form letter.

As a general rule, your estate should be the beneficiary of your IRA,
not your spouse. As for IRA distributions, you must pay income tax as
ordinary income. And if the residual after tax, when added to the
estate, causes the value of your estate to exceed the exemption limit,
your heirs will have to pay a Federal estate tax on the excess amount.
Of course that assumes you don't spend any of the money from the IRA
distributions during your lifetime, which is highly unlikely.

Regarding the overall tax rate on IRA distributions, the figure of 80%
you were quoted is quite unrealistic. That would obtain if you pay
the maximum income tax rate of 35% on your IRA distributions and your
heirs pay the maximum estate tax rate of 47%, totaling 82%. To be in
that tax bracket your taxable income would have to be over $88,000
(filing jointly), and your estate on the death of the second spouse
would have to exceed the exemption limit (currently $2 million) by $2
million. That is, your estate would have to be worth more than $4
million.

The lowest marginal rate on the unified estate and gift tax is 18% on
the first $10,000 above the exemption limit. The highest marginal
rate is 47% on the amount exceeding $2 million. The tax on an estate
worth $100 million would be $46.4 million, but I suspect few actually
pay that large a tax because of the various options available such as
prior provisions for foundations, charitable gifts, etc.

And isn't the remaining money (after the estate tax) also considered to be
income? If in your $100 million example, about half is estate tax and the
other half is income in the 35% bracket, then the total tax would be in the
range that TIAA/CREF warns me of.

There is no income tax on the money the heirs receive from the estate
on the death of the second spouse. Likewise there is no estate tax on
the assets they receive from the decedent's trust on the death of the
second spouse. However the heirs will have to pay capital gains tax
on the sale of appreciated assets in the decedent's trust.

Before the death of the second spouse, all of the income in the
decedent's trust is normally transferred to the survivor's trust and
income taxes must be paid by the surviving spouse on that amount.

What does all this mean? The total estate and gift tax collected
obviously depends on the distribution of all estate values. The total
value of estates in the region of $5 million very likely exceeds that
of estates in the $100 million region. A lot of estates valued in the
vicinity of the exemption limit can explain why there would be a low
average tax rate.

Yes. But it would take a lot of $5M estates relative to $100M ones to
result in an average of 12.5%. I think the popular impression is that the
estate tax collects from the very rich, not from those at the upper edge of
the "middle class".

I wouldn't call a family with assets of $5 million "middle class."
Middle class is someone who has to make serious choices about what
something costs, and perhaps have to finance the purchase of a car
rather than paying cash for it.

The heirs of the very rich have numerous ways to reduce the high
estate tax rate, and still enjoy many of the benefits of the largesse.
.

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