Tax Update – An EVEN BETTER WAY To Get Your First $10 Million

Earlier this week I posted about how the tax code incentivizes you toward the old-fashioned way to make your first $5 million: Inherit it.

That’s because, at least until December 31st, the first $5 million you receive through estate inheritance comes to you tax free.

I was trying to point out that there’s no better way to get ahead in life, as the tax code tends to take your money away if you are so foolish as to, you know, actually work for a living.

But, as the Wall Street Journal reminds us today, there’s an even better way to make your first $10.24 million, at least until the law changes or gets updated on December 31st.

An expiring but very generous lifetime federal gift-tax exemption allows individuals (presumably your parents) to gift you up to a maximum of $5.12 million each[1], without paying any taxes on it.  This works like the better-known $13,000 annual gift tax-exemption, except your parents can only take advantage of it once.

This is far better than the estate tax gift I mentioned earlier in the week.

You see, the downside of inheriting $5 million is that somebody close to you has to die first.  That’s kinda sad, and it’s also hard to count on, timing wise.  You might need the $10 million, like, right now.  But fortunately, because of this generous lifetime gift exemption, your living parents can start you off right in life, like, right now.

So, Richie Rich, you have no time to lose because the tax code either reverts to a $1 million lifetime exemption per person[2] next year, or Congress passes a law to extend the gift-exemption.

I think its time to be nice to your parents again.

And if that doesn’t work, get on the phone with your Congressman and get him to extend that exemption.

“Either way, Daddy, start writing checks!”[3]

[1] Hence, the $10.24 million total, $5.12 million from each parent

[2] $2 million if both your parents maximize their lifetime exemption.

[3] as I once heard a classmate at Harvard say, un-ironically, when she didn’t get into the prestigious dormitory of her choice

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8 Replies to “Tax Update – An EVEN BETTER WAY To Get Your First $10 Million”

  1. Estate tax PUNISHES small business. Hence, respectfully, I must disagree. Look, let me explain in this hypothetical: HYPOTHETICAL — For the last 100 years your family has been farming in Iowa. The land values in Iowa have now risen to over $ 3,000 an acre (it was 10 cents an acre when your family started in the pioneer days over 100 years ago). Your farm is worth $ 5 million in LAND VALUE yet you don’t make any money because the wheat market is fickle. You don’t have $ 5 million in the bank; it’s tied up in land ! But you love your farm. Your family has been working on the farm for generations. It is your life; your love. The family farm. You and your family devoted toil, sweat and tears to make something of the place because you LOVE THE LAND. Now comes the estate tax when your parents die and you MUST SELL MOST OF THE FARM BECAUSE YOU DON’T HAVE THE MONEY TO PAY THE ESTATE TAX! The first million is exempt but after that you are taxed at 55% rate on the next $ 4 million; that’s over $ 2 million dollars. You don’t have that kind of money so you must SELL MOST OF THE FARM. Two days after you sell most of the farm to pay the multi-million dollar estate tax, speaking hypothetically, YOU DROP DEAD FROM A HEART ATTACK (doubtless caused from having to sell most of your beloved farm). Now your kids must pay another estate tax! Your kids must sell the REST OF THE FARM because THEY HAVE TO PAY ANOTHER ESTATE TAX ON THE SAME FARM ! The same estate tax YOU just got through paying!! Totally unfair. It will wipe out farmers and small family businesses that have been feeding and helping customers for generations.

    1. The key part about your comment is that its ‘hypothetical,’ and I would venture to say extremely ‘hypothetical’ to the point of misleading.
      Estate Tax opponents like to use the hypothetical family farm or hypothetical small business as the reason to appeal, emotionally, to old-fashioned American values.
      But what the repeal of the Estate Tax really is about is far from the small farm or small business. It’s really about large business and large fortunes, and whether or not they can be passed tax-free to the next generation.
      I’d be happy to engage in a dialogue about inter-generational wealth transfer. I even think people can make a legitimate argument in favor of encouraging wealth to pass inter-generationally.
      But I don’t think a legitimate argument can be made by hiding behind the emotionally appealing, but highly hypothetical, myth of the Iowa family farm. Its a mythological, emotional, dodge so I’m sorry I can’t engage in that discussion.

  2. I have seen this argument by a rancher who supported the hypothetical argument in the above comment. I have a friend who is using a large death insurance policy on his mother in order to pay the death tax when it comes due. I would be very interested in hearing your side of the story.

    1. I can assume that your ‘friend,’ who is rational, has already received his $5.12 million gift-tax exemption transfer from his mother. I can further assume that your ‘friend’ will maximize his estate tax exemption upon the death of this mother, which currently is another $5 million. So he’s already $10 million ahead, having paid no taxes, a pretty good start in life.
      After that, he’ll receive his proportionate amount of the estate, after paying estate taxes, currently 35%. So, if your friend uses his ‘large death insurance policy,’ of say, $3.5 million, he can have another $6.5 million on his mother’s $10 million estate.
      It seems to me like tax policy has been pretty good for your ‘friend.’ In any case it sure beats working for a living, which gets taxed right away.

  3. Yes he is very rational. Most of the estate is in commercial real estate in the San Fransisco Bay Area started by his father who has already passed on some years ago. I am just becoming aware of this as he mentioned the policy and its purpose to me during a discussion we had last year. I have found your website to be extremely informative and am very grateful that you have shed light on these matters for people who want to know. I will continue to visit your site and learn. Thank you for your prompt and informative response.

  4. This is great stuff!

    I’m curious to hear your thoughts about how to best reform tax policy (maybe this is a separate blog post). I’m an advocate for eliminating or significantly reducing tax expenditures for various reasons I won’t go into at the moment. However, I think people underestimate the challenge of broadening the tax base without it having a relatively significant impact on those $250k. I believe this is essentially the reason why Romney’s tax plan was mathematically improbable given that he promised no tax increases on the middle class and no increases in cap gains rates either (i.e., where else are you going to get the money to achieve “revenue neutral”?)

    This leads to us the most controversial tax expenditure: capital gains. I believe this is the one tax expenditure we must address if we want those making >$250k to contribute more revenue. Having said that, there seems to be some reasonable arguments against *any* taxation of cap gains altogether. Are we in a position where we must move to a (progressive) consumption tax if we believe it’s in the best interest to not tax cap gains at all?

    So, let me start with a more fundamental question:

    Assuming we all agree that tax policy must be reformed, do you think that *all* income groups must contribute, with the largest % coming from the top 5% (similar to the Simpson-Bowles plan)? Or do you think the effective rates of lower and middle-income groups should remain untouched (given today’s somewhat fragile economy) and the increases should be focused on the top 5% (>$250k), whether it’s increasing the top two marginal rates or implementing changes in cap gains taxation?

  5. Sorry, type above. Should say:

    “However, I think people underestimate the challenge of broadening the tax base without it having a relatively significant impact on those making <$250k."

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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