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Money and inheritance


shalab
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Strictly from a capital allocation standpoint, I subscribe to what Parsad says - capital will do good for society if it is allocated efficiently. Heriditary inheritance does a disservice to society. I think Buffett is right about inheritance tax...

 

 

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In theory this is fine but in pratice it can be much more complicated especially when the wealth is in the form of a privately held business or real estate/farm.  In Buffett's case, the problem is simple due his investment fund being BRK's primary asset (even his non security assets were not personally built by him). But, in the case of a private businessman who wants to pass his business/farm to his children who also want to run the business does it make sense to have them to pay cash on an inherited illiquid asset and in some cases force them to sell non-liquid assets to pay a gov't bill? 

 

Packer 

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We’ll be the heretic ….

 

You die, your estate sells all your assets & ends your tax deferrals … as they are your assets & liabilities,  not your kids. Calculate tax the normal way & the “inheritance” tax is what your estate paid the year you died – less what you paid the previous year. 

 

Great grandpa passed along the farm in 1935 (depression valuation) & you pass it to a grandkid in 1990 – 55 years later (your ghost reads this board). Nothing but rocks & a hay crop once/yr. Except ….

 

This farm is now in the city which has grown up all around it (bubble valuation). Highest & best use is to plant condos on it (assuming you can sell them). Lots of jobs, & short/long-term economic activity for all …. but nothing can happen until you plant.

 

Grandpa, dad, & I are farmers … it’s what we do … this is where we farm! … it’s good land!! 

 

It may well be. But the fact is you would be better off selling that high priced high quality land, buying similar but lower priced quality elsewhere, & investing the difference in machinery to help you farm better, more effectively, etc. If the estate does not want to sell it can borrow against the land to pay the tax, & pass both the land & the debt on to you.

 

The cash debt service cost is the monthly cost of your decision. Time/progress moves on; if you want to stop it - you have to pay for the privilege.

 

SD

 

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We’ll be the heretic ….

 

You die, your estate sells all your assets & ends your tax deferrals … as they are your assets & liabilities,  not your kids. Calculate tax the normal way & the “inheritance” tax is what your estate paid the year you died – less what you paid the previous year.   

 

Great grandpa passed along the farm in 1935 (depression valuation) & you pass it to a grandkid in 1990 – 55 years later (your ghost reads this board). Nothing but rocks & a hay crop once/yr. Except ….

 

This farm is now in the city which has grown up all around it (bubble valuation). Highest & best use is to plant condos on it (assuming you can sell them). Lots of jobs, & short/long-term economic activity for all …. but nothing can happen until you plant.

 

Grandpa, dad, & I are farmers … it’s what we do … this is where we farm! … it’s good land!! 

 

It may well be. But the fact is you would be better off selling that high priced high quality land, buying similar but lower priced quality elsewhere, & investing the difference in machinery to help you farm better, more effectively, etc. If the estate does not want to sell it can borrow against the land to pay the tax, & pass both the land & the debt on to you.

 

The cash debt service cost is the monthly cost of your decision. Time/progress moves on; if you want to stop it - you have to pay for the privilege.

 

SD

 

 

 

The truth is that practically all human progress happens when people have idle time on their hands, supported by accumulated wealth or the labor of others, when they don't have to spend all their time scraping out a meager subsistence. 

 

An aborigine with a full belly and time on his hands sits around a quiet campfire and makes an improvement in his bow.  A high functioning autistic like Cavendish inherits enough wealth to fund his own scientific experiments.  A nerdy kid like Gates gets an early withdrawal on his inheritance and is able to "waste"  thousands of hours playing with computer programming before shortsightedly giving up his chance of getting a great, high paying job with a Harvard degree.

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The truth is that practically all human progress happens when people have idle time on their hands, supported by accumulated wealth or the labor of others, when they don't have to spend all their time scraping out a meager subsistence. 

 

An aborigine with a full belly and time on his hands sits around a quiet campfire and makes an improvement in his bow.  A high functioning autistic like Cavendish inherits enough wealth to fund his own scientific experiments.  A nerdy kid like Gates gets an early withdrawal on his inheritance and is able to "waste"  thousands of hours playing with computer programming before shortsightedly giving up his chance of getting a great, high paying job with a Harvard degree.

 

This is an interesting post and something I hadnt considered. I myself want to get rich so I can have some idle time to do as I please.

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".....capital will do good for society if it is allocated efficiently. Heriditary inheritance does a disservice to society. I think Buffett is right about inheritance tax..."

 

Are you saying that the money generated by the inheritance which goes to the gov't for social engineering is money that will be "...allocated efficiently..."????    C'mon are you kidding??

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The argument may be logical for the inheritance tax, but it is immoral IMO.  If someone were to accumulate wealth, that is their property... it should be dispensed as they see fit.  I think it is very commendable that one would choose to distribute their money but I find it corrupt to force them to.  I personally will leave my children with enough as I decide, and the rest will be donated... but I strongly disagree with the government taking the money of a deceased person and using it as they see fit.

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".....capital will do good for society if it is allocated efficiently. Heriditary inheritance does a disservice to society. I think Buffett is right about inheritance tax..."

 

Are you saying that the money generated by the inheritance which goes to the gov't for social engineering is money that will be "...allocated efficiently..."????     C'mon are you kidding??

 

I guess it will depend on what alternatives that one compares to "giving to goverment."

 

Is inheritance tax earmarked for social engineering only, really?  Can't revenue collected from inheritance tax be spent in positive things such as education, research or SEC enforcement division?   

 

If one does not want to pay inheritance tax, one can always set up a charity foundation and have children run the business adventure via the foundation.

 

Just do as Buffett does then one will pay very little inheritance tax.  ;)

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The object of the tax is to trigger accumulated unrealized gains/losses, not redistribute the wealth.

 

The "inheritance tax" is the subsidy you've been receiving each year because you've been able to defer the asset sale. The resentment is because the subsidy became an entitlement, paying it back was never really in the plan, & the 'heirs' are going to get less because of it.

 

The retain/sell decision is your heir's, not yours.

 

SD

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The object of the tax is to trigger accumulated unrealized gains/losses, not redistribute the wealth.

 

 

When you die your assets get up a step-up basis. You aren't taxed on unrealized gains, no matter how long you've held the asset or how big the unrealized gain. Your assets transfer to your heirs at the market value on date of death, and that date of death value becomes the heir's new cost basis.

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So, if there is no tax on unrealized gains then the inheritance tax is pure confiscation of an individual's wealth for the purpose of re-distribution.  Is that correct???

 

I'm trustee for a few trusts right now, so i had to learn some of this stuff at a young age. Mind you, i said trustee, not beneficiary...

 

I won't get into the whole distribution of wealth stuff, but yes there is not a tax on unrealized gains.

 

In fact many states no longer have "inheritance taxes". There is a federal estate tax, which is different than the inheritance tax (many people use them interchangeably), but that doesn't even kick in until you hit the $5 million mark, or $10 million if you do some estate planning. Some states have inheritance taxes, some have state estate taxes, a few have both..., a few have neither. All have the federal estate tax, but the exemption is high.

 

Unless you are in that ballpark i wouldn't even sweat it for your own estate, unless you live in the wrong state.

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Tax treatment differs north of the border.

 

Everything is 'deemed' to have been sold on the day you died, whether it was actually sold or not. While in probate the resultant tax, funeral, accounting & legal bills, etc. are paid by the estate, following which the residual is distributed to the heirs. If there is insufficient liquidity (unlikely if there's life insurance) estate assets are sold off to raise the necessary cash. You receive the asset at market value, & the estate takes the tax hit.

 

Obviously there is room for tax planning, but the taxman still gets his lb of flesh.

 

SD 

 

 

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In theory this is fine but in pratice it can be much more complicated especially when the wealth is in the form of a privately held business or real estate/farm.  In Buffett's case, the problem is simple due his investment fund being BRK's primary asset (even his non security assets were not personally built by him). But, in the case of a private businessman who wants to pass his business/farm to his children who also want to run the business does it make sense to have them to pay cash on an inherited illiquid asset and in some cases force them to sell non-liquid assets to pay a gov't bill? 

 

Packer   

WEB was on the invitees before the senate committee reviewing this some time ago.  One other gentleman was a farmer with a similar issue.  WEB's suggestion after hearing the farmer was that payment of the tax can be deferred to a point where the farm is sold or ceases to be part of the family.  Until that point in time, the estate tax due will show up as a liability.  I thought it was a brilliant suggestion.

 

For real estate, can't you 1031 into something more marketable/liquid and then use part of that to pay the taxes?

 

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Tax treatment differs north of the border.

 

Everything is 'deemed' to have been sold on the day you died, whether it was actually sold or not. While in probate the resultant tax, funeral, accounting & legal bills, etc. are paid by the estate, following which the residual is distributed to the heirs. If there is insufficient liquidity (unlikely if there's life insurance) estate assets are sold off to raise the necessary cash. You receive the asset at market value, & the estate takes the tax hit.

 

Obviously there is room for tax planning, but the taxman still gets his lb of flesh.

 

SD   

 

 

Sharper in Canada you can leave it all to your spouse  tax free it is the surviving spouse who has to pay the

tax. I am not sure what happens if your grieving spouse remarries, does it get deferred yet again. Taxes are too low south of the border given the demands that its citizens put on their government. I watched Bill Gross on CNBC this AM stating that corporate taxes as a precentage of corp. revenue were the lowest in 30-40 years. I read on this site an economic report that stated 25% of US households have a negative net worth and 40% of black households have a net worth less than zero and that the median house hold net worth of a Blackfamily in 2009 was $2200.00....

and the house republicans want to cut entitlements because the country can not afford it. Just who is going to suffer the brunt of any entitlement cut backs. The tea partiers are largely dominated by over 50 affluent white males. They are the angriest segment of the population right now if these trends continue I think they will be confronted with mob anger not voter anger.  Sorry used up my rant quota today I know.

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