A little post-mortem estate planning. First the wife’s executor should disclaim $1.0 Million of assets preferably in the stock of the company (we’ll explain later). That way, his estate gets to use its $1.0 Million exemption and her estate gets to use her $1.0 Exemption. This reduces the tax by $500,000. Not there yet. However, since she disclaimed her interest in the business, it is still worth $2.5 Million, but her interest may be subject to some discounts as high as 25%. This means that her interest may only be $1.0 Million. That leaves the IRA and the houses and the condo to be taxed at $700,000. Sell the houses, since there is no capital gains there and pay the taxes with the proceeds. That leaves the $800,000 IRA which can be drawn down over time.
Monthly Archives: June 2010
What the kids are looking at?
First, the lawyer says to the kids, “we need to determine the value of your father’s business. It throws out an income stream of $300,000 per year. Assuming that you had to hire a manager for $200,000, that’s a $100,000 a year income stream. Given current income rates the amount of principal needed to generate a dividend of $100,000 would be $2.5 Million. So, the store could be worth as much as $2.5 Million, we’ll need to get an appraisal. The rest of the property is pretty easy to determine, its worth about $1.4 Million. So, your dad’s estate is worth $4.9 Million. There is an exemption of $1.0 Million and that’s it. So there will be an estate tax of approximately $2.0 Million on this estate.” The boys were crestfallen. “$2.0 Million? We can’t come up with that kind of money right away.” “It gets worse”, said the lawyer. “Worse, how can it get any worse?” “Well, on the $800,000 retirement account, you have to pay income taxes to liquidate that account. So, you’re looking at income taxes of about $320,000 to take money out of that account in order to pay the estate taxes.” Bruno, Jr. was heart-broken and a bit angry, “you mean that we’ve worked in that store for 20 years smelling feet and in order to continue to own the store we might have to pay the Government $2.32 Million?” “That’s about the size of it”, said the lawyer. “But there is one piece of good news” said the lawyer. “What’s that”? asked Viggo. “The Government might allow you ten years to pay off the tax”.
What to do in 2011
As much as it pains me to say, there may be only a $1 Million exemption in 2011 for estates. So, let’s look at Bruno who owns Bruno’s Shoe Store located in a condo retail park in Fredericksburg, VA. He also made the smart move in 2005 to add a web-site to sell shoes on-line. This has increased his sales greatly. At the end of 2010 his annual sales are $1 Million. He takes out of the store after paying salaries, inventory and usual operating expenses about $300,000 a year. He owns the business as a Sub-chapter S corporation per the recommendation of his accountant. The Condo is owned by an LLC which he and his wife own together. The condo is worth $125,000 and there is no debt. He and his wife own a home in Chancellorsville worth $300,000 and a cabin at Lake Louisa worth $200,000. His retirement account has $800,000 in it and it leaves everything to his spouse. On January 1, 2011, while he is doing inventory a shelf full of shoes falls on top of him, killing him instantly. When he doesn’t come home for dinner his wife calls the store, no answer and then calls the police who discover his body that evening at the store. They inform his wife who is so grief stricken that she has a heart attack and dies two hours later, leaving two adult children, Bruno, Jr. and Viggo. They both worked in the store th elast two years and want to continue the business. They appear at the offices of Slim Shades the noted estate tax attorney, to get advice about the tax effects of all of this.
The verdict
“It means that on the $50 Million of negative capital account you owe ordinary income taxes at your rate. Since this is 2011, you owe them at 39.5%. That translated into $19.75 Million. You also owe capital gains taxes, that translates into $20 Million dollars. You also owe state taxes that translates into $8 Million. So that’s $48 Million dollars. Subtract out the debt of $50 Million. That leaves untaxed $52 Million to be divided among your family members. The family trust gets the entire $52 Million. That means that you won’t see the money until your momma dies. And then you have to divide what’s left among your siblings.” “Oh, that’s pretty bleak” said Delicious.
The story
“Well”, said Snotnose, “you see, your father had a negative capital account in those real estate partnerships. That means that he took losses greater than what he contributed into the partnership. Further his carry-over losses were lost when he died. Because you did not receive a basis increase at his death due to Section 1022, you recognize ordinary income to the extent of his negative capital account.” “How much is that? asked Delicious. “About $50 Million. The rest is capital gain. But of course there is debt on the property of $50 Million” said the lawyer. “So what does all that mean?” asked Delicious