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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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This is for Lane. Her argument continues. This is her response

Resolved Question:

This is for Lane.

Her argument continues. This is her response to my rebuttal. Unfortunately, I know very little about gift tax. However, her logic still seems faulty. Can you help with this?

Gift tax and Estate taxation go hand in hand.

When a person makes a gift, and the fair market value is greater than the annual exclusion, a gift tax return is required to prepared and filed. The unified credit that is utilized is based on the FMV of the gift not the cost basis of the person who is making the gift. The unified credit that is utilized on the gift tax return, reduces the credit that is available at death of this person. If the credit is utilized all I am saying it that it is unfair that the person recieving the gift does not get a step up in basis equal to the FMV that was used on the gift tax return.

Example; Let's say I have 6 million in assets FMV, but my cost(basis) of 1/2 that. I decide to give you an asset that is FMV 1 million but it basis is 500,000. I am using my unified credit to transfer 1 million as a gift to you. So I die fours years after the gift. My estate is still worth 6 million and a taxable estate is anything over 5 million. Since I used 1 million in the gift I transfered four years ago, my taxable estate is at the time of death 2 million not 1 million, so I did pay the tax at the time of the gift, but you did not get the step up in basis.
Submitted: 1 year ago.
Category: Tax
Expert:  Lindie-mod replied 1 year ago.

Hello,

I'm Lindie, and I’m a moderator for this topic. I sent your requested professional a message to follow up with you here, when they are back online.

If I can help further, please let me know. Thank you for your continued patience.

Best,

Lindie ~Moderator

Expert:  PDtax replied 1 year ago.
Welcome to the site. I saw your question, and can assist if you like. Your requested pro is not online yet this morning.

PDtax
Expert:  Lane replied 1 year ago.

She's still comparing apples and oranges.

Not getting a step up in basis for when I eventually (if ever) sell the property ...

And that gift being large enough potentially to eat away at some of the unified credit when the person dies (the time of the taxable event)..

are to different things; (tow different taxes)things which manifest in totally different ways

Further, the estate tax will always happen (people always die), but the capital gains tax may NEVER happen (the inheriting heir may never sell) .. there are lots of cases ESPECIALLY with family estates where the assets keep being passed from generation to generation.



Here last paragraph says ...

Example; Let's say I have 6 million in assets FMV, but my cost(basis) of 1/2 that. I decide to give you an asset that is FMV 1 million but it basis is 500,000. I am using my unified credit to transfer 1 million as a gift to you. So I die fours years after the gift. My estate is still worth 6 million (WRONG, YOU GAVE AWAY 1,000,000 OF IT ... THAT's NOT IN THE ESTATE ANY MORE)


and a taxable estate is anything over 5 million (WRONG - EXEMPTION EQUIVALENT IS NOW 5,250,000 - AND WILL BE GOING UP EVERY YEAR ... AND ... WITH THE NEW PORTABILITY RULES, THE EFFECTIVE CREDIT IS NOW REALLY 10,500,000.


Since I used 1 million in the gift I transferred four years ago, my taxable estate is at the time of death 2 million not 1 million, so I did pay the tax at the time of the gift, but you did not get the step up in basis. TRUE, BUT AGAIN, SHE'S EQUATING TWO UNRELATED THINGS (related only in that they end up POTENTIALLY effecting the same person)

... so I did pay the tax at the time of the gift, but you did not get the step up in basis. ONCE AGAIN SHES EQUATING TWO DIFFERENT TAXES ... THE RELATIONSHIP SHE SEES THERE IS SPURIOUS.


Lane
Customer: replied 1 year ago.
Thanks. I saw the errors you noted. Could you explain why the taxable estate at the time of death is $2 million not $1 million?
Expert:  Lane replied 1 year ago.

Yes, I almost corrected that one too... but that part of her argument is valid. She's trying to say that by giving the gift at FMV of 1,000,000 the giftor (eventual decedent) has deducted it from the exemtion equivalent (from what will be exempt from estate tax at death)

She DOES understand that the federal estate tax system is a UNIFIED gift and estate tax system. This is a system of transfer taxes ... (Either a gift during life, or the last gift, - the transfer of the estate, at death).

So, when someone does give a gift of over that 14,000 per year that's exempted, they are required to fill out a gift tax form, (although no tax is owed at that point), so that those lifetime gifts can be deducted from whatever is left in the estate, to see how much of that credit is left at death. ... Its a unified gift and estate transfer tax.



So, for example, (and we'll leave the linking and portability issue out of this to make it simple) the exemption equivalent (the amount I can pass without having any estate tax) is $ 5,250,000. ... And lets say that I gifted $3,250,000 diring my life and died this year, and of course filled out the gift tax forms as I did, so that it could be tracked (accumulated against that future credit) ... That means that my estate can still be worth 2,000,000 before the next dollar has any estate tax.

She understands that part. That's why she said it's worth 2 million. What she should have said is "worth EFFECTIVELY 2 million," ... becuase giving that money away (because one must fill out those gift tax formsfor future reference) HAS reduced the credit that will be applied at death.



BUT where her logic is flawed, is in not understanding the the eventual capital gain on an inherited (which MAY have been well below the levels we're talking about here anyway) when sold IF SOLD AT ALL (an income tax) is not interchangable with the
estate tax, a transfer tax.

How the transfer tax effects everything from tax policy, to economic impact, to fiscal policy ... is much more predictable than (and has completely different effects from) some POSSIBLE, potential future gain on sale of an asset.


The relationship she sees is spurious. They are related in that they only (MAY only) affect the same person.



Just because they sell more ice cream in Chicago in the summertime ... and crime goes up in the summertime ... doesn't mean the two are related. ... and it certainly doesn't mean that eating ice cream causes crime.

(That's the first definition/ description I ever heard regarding spurious relationships ... something that's very important when doing any real research to establish causation)

She assigning the setp up in basis and the estate tax a relationship that isn't there.


Customer: replied 1 year ago.
Thanks for your help. I hope I am not being dense. As I mentioned my knowledge of gift and estate taxation is somewhat limited. However, I intend to change that soon. I think you are saying that gifts given throughout a person's life time are deducted from the exemption amount. Therefore, if an unmarried donor gives $5,250,000 in gifts throughout his or her life and dies this year, and his or her estate at time of death is worth $6,000,000, he or she has used the entire credit. Consequently,the estate will be taxed on $6,000,000. Is this correct?
Expert:  Lane replied 1 year ago.


You have it!

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4544
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane
Lane
JD, MBA, CFP, CRPS
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986