Beware, the $5 Million exemption is Federal only. You need to look at your state laws to see if there is a State Estate tax and what the exemption amount is. Many states decoupled from the Federal Estate tax. So, let’s say pops dies in 2011 owning $10 Million in property. He leaves it all in a credit shelter trust. Let’s assume that he lives in a state with a State Estate Tax, he’s going to be subject to that tax (perhaps as much as 20% in some states) on $4 Million. With the new Act allowing the wife to tack on the Husband’s Federal Estate Tax exemption, it is better to make the Family Trust limit be the $1 Million amount with the rest being put in a qualified terminable interest trust (QTIP) for Moms. That way when Mom dies, it she can add together the exemptions and delay the estate tax in the estate. Many states do not have a gift tax, so if Mom and Dad are willing to make huge gifts in 2011 and 2012, and trust their kids (a huge assumption), this could be a strategy especially early in 2011 before such laws are enacted to close that “loophole”.
A new Thought on the GST
Contrary to my earlier assertions, gifts in Trust over the $1 Million gift tax could be subject to the GST when a skip person dies. It is better to make gifts directly to skip persons such as grandchildren and great grandchildren in 2010.
Christmas Eve
As we get ready for Christmas, this is a time to think about the meaning of Christmas. As a Christian, Christmas is about the birth of our Savior, Jesus Christ. As the parties wind down, and the family gatherings begin, those of you who believe that Christ was the Son of God, take time to worship and thank God for the gift of his Son to us. Merry Christmas.
How a Tax Benefit becomes a Shelter
Joe owns a short line railroad. Joe needs to repair a bridge over the Little Stinky River. But Joe doesn’t have any money and his profitability is so low, he can’t get a bank loan. No problem. Joe is having a few stiff ones at the local bar and is sadly telling the bartender that without repairing the bridge, he’ll have to shut down his railroad. Ted Tax Lawyer is sitting at a nearby bar stool and says, “there might be a way to do this. How many miles is your railroad?” “100”, Joe answered. You need to set up an LLC and assign your track to it for a $1 for 3 years, and the bridge for 20 years. The LLC will charge the railroad a toll to cross it.” Ted asks Joe how many trips across the bridge per day and Joe says, “two, One up and one back”. “So that’s 730 trips a year? How much will it cost to fix the bridge to like new?” Joe thinks for a minute and says, “$1 Million”. “And the bridge will last for how long? Ted asks. “20 years”. “Okay so that’s 14,600 trips over the bridge for its lifetime is that correct?” Ted inquires. I guess, so, Joe answers.” Ted, pulls out his calculator, “that adds up to $69 a trip. So, you now sell shares in the LLC to investors, ” Tax Lawyer Ted replies. “But who would buy it?” Joe asks, pleadingly. “Guys who want a tax credit, now”. They can buy a share in the LLC and when the LLC spends the money on the bridge, they get up to a 50% credit which is paid back in dribs and drabs over 20 years as income. So, each share would be $7,000 since there is a cap of $3,500 per mile per year. You’ll need to take three years to repair that bridge. So, for every dollar invested they get a 50% credit on their taxes in the for each year” Tax Lawyer Ted explains. That means if a guy invests $100,000, he is creditted with having already paid $50,000 to IRS on his taxes”.
So that’s how a tax shelter works. A benefit such as this, has to be (1) Assignable; (2) spend; and (3) large enough to get someone’s attention as a credit.
Some Christmas Candy
In the new Tax Act there are a number of business incentives and what some would euphemistically call loopholes. However, these loopholes can be advantageous for some.
They continue some of these things which would have expired at the end of 2009. These include the Research Credit, Indian Employment Credit, Railroad Track maintenance credit, rapid depreciation for car race tracks, rapid depreciation for business property on an Indian Reservation, enhanced charitable deduction for donation of school book inventory, DC and Puerto Rico Investments, and extension of the 100% gain on certain small business corporation stock. Today’s loophole is tomorrow’s tax shelter. Where you see the words “accelerated” or “rapid” depreciation, that means you can invest in something and get an early write-off. The word “credit” means you get to reduce your tax by a dollar for every dollar of credit. Again, this is a great thing.