Federal Estate Tax Information

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Federal Estate Tax Information: Congress Fails To Repeal Federal Estate Tax and Six Ways To Avoid It

by Mark Skousen, Chairman, Investment U
Monday, June 19, 2006: Issue #547

On June 9, Senate Republicans failed to repeal the federal estate tax on inherited wealth. The vote was 57 to 41 in favor of the bill, but it fell three votes short of ending debate, dooming it on procedural grounds.

Personally, I’m glad the bill failed. Not that I’m in favor of a death tax; I see no reason why your heirs should have to pay the government just because of your demise. A death tax is not morally justifiable.

The problem with the bill, though, is that it didn’t really eliminate the “death” tax. In fact, it was worse, because everyone would have been subject to a monstrous new tax if this bill had passed. What tax, you say? The 15% capital gains tax. Let me give you the straight facts and information here

Thank Goodness! No New Taxes On Inherited Wealth

Under the current federal estate tax law, heirs don’t have to pay capital gains tax on any stocks, bonds, real estate, or collectibles they inherit, even if they sell it and take the cash. The tax basis of all inherited assets are automatically “stepped up” to the price at the time of your death.

For example, suppose your rich uncle decides to leave you 10,000 shares of IBM (NYSE: IBM), which he bought at $10 a share in 1960. This year, he suddenly dies, and you inherit the IBM stock, now worth approximately $800,000. Under the current federal law, you would owe no tax whatsoever, even if you sold the stock.

But under the new estate tax bill, you would have had to send Uncle Sam a check for approximately $108,000. In fact, it was estimated the new estate tax bill would have generated more revenue than the current estate tax.

Furthermore, many states have – or will soon reinstitute – a state inheritance tax, caused by the huge loss of tax revenue created by the increase in the federal estate tax exemption, now at $2 million.

So Much for the Republicans’ Attempt To “Repeal” the Death Tax!

The fact of the matter is that the bill was just a sneaky way to tax us more. Fortunately, the Democrats would have none of this, and wisely opposed the measure (though probably for reasons other than mine above).

The Congress would be wise to extend the federal estate tax law as currently written. At the moment, the government imposes a tax of about 46% on estates worth more than $2 million, or more than $4 million in the case of couples that have doubled their exclusion by properly establishing the necessary trusts (A/B By-Pass Trust, also known as the Credit Shelter Trust). Thus, the federal estate tax affects only 2% of estates anyway.

Helpful Federal Estate Tax Information: Six Ways To Avoid the “Death Tax”

Moreover, there are legally acceptable methods, or tricks, to plan your estate and avoid federal estate taxes:

Buying life insurance and naming your heirs as the owner.
Changing ineffective, underperforming life insurance policies into a new increased protection policy without any additional premium outlay.
Converting some of your investments and retirement plans into guaranteed lifetime income annuities with no refund.
Creating a reverse mortgage, which provides tax-free lifetime income to you until you die or the surviving spouse leaves the home.
Establishing a Charitable Remainder Trust (CRT) with your favorite church, alma mater, free-market foundation, or your own Private Family Foundation. The CRT pays you a lifetime income, and when you die the asset goes to the charity of your choice or your Family Foundation, plus you receive a sizable upfront tax deduction for the contribution.
Last but not least, adopt the “never die unmarried” strategy. If you die married, your spouse automatically gets all your assets unless you designate otherwise.

Where To Go for the Best Advice and Info on Avoiding the Estate Tax?

Call David T. Phillips, author of the book Estate Planning Made Easy, at Longevity Alliance in Arizona, 800.223.9610. Dave is the best estate-planning expert I’ve ever met, and he can answer all your questions about avoiding unnecessary estate taxes and help you properly plan your estate. There’s no obligation when you call, and they won’t call you unless you request it. Now that’s my kind of estate planner.

Good trading,

Mark

P.S. In an upcoming Investment U e-Letter, we’ll take a look at the three forces emanating from the Federal Reserve Building in Washington, D.C. threatening Wall Street’s long-term bull market. Stay tuned!

Today’s Investment U Crib Sheet

If you’re looking for more ways to reduce your taxes – especially if you’re beginning to make retirement plans – check out Investment U # 536, Tax Havens: States with Favorable & Friendly Tax Situations. I’ve listed five tax-friendly states, one of which – Florida – recently repealed its “Nuisance tax.”
Also, if you haven’t done so already, check out former Investment U Chairman Steve Sjuggerud’s 12 Timeless Rules of Investing.