Friday, September 16, 2011
Sunday, November 21, 2010
Tuesday, November 16, 2010
There is no estate tax liability for assets passing from a deceased spouse to the surviving spouse. Both Ohio and federal provide for an unlimited marital deduction for the transfer of property between spouses. This is based upon the view that the husband and wife are one economic unit.
The marital deduction applies to transfers during lifetime and at death. The deduction is only for
Technically, the marital deduction simply defers the estate tax and does not avoid it. While an outright bequest of decedent’s entire estate to a spouse will eliminate estate tax at the decedent’s death, the surviving spouse’s estate will be taxed on all of the assets transferred from decedent (that is unless the surviving spouse consumes or gifts away the assets). As a consequence, the marital deduction simply defers the tax to the second estate.
Friday, July 31, 2009
When you purchase an asset, the purchase price becomes your tax basis for that property. If you later sell that asset, your tax basis is used to determine your capital gain or loss for tax purposes.
If you receive property by gift, you take the donor’s basis. For example, Mr. Smith purchases ABC stock for $10 a share. Mr. Smith’s basis is $10 a share and if he sells the stock, his gain or loss would be based upon his $10 tax basis. Mr. Smith, instead of selling his ABC stock, gives his son the stock. His son’s basis is also $10 per share. This is sometimes called a “carry-over” basis, because Mr. Smith’s tax basis carries over to his son.
One benefit of inheriting property from a decedent is receiving a “stepped-up” basis. Pursuant to Internal Revenue Code (IRC) §1014, the basis of property inherited from a decedent is generally the fair market value of the property at the decedent's death, as opposed to the decedent’s cost to acquire the property. For example, Mr. Smith leaves his ABC stock to his son in his will. At the time Mr. Smith passes away, the value of the stock is $25 per share. Although Mr. Smith’s basis was $10, his son’s basis is stepped up to $25.
The benefit of the “stepped-up” basis will not be with us much longer, barring a legislative change. This is because the “stepped-up” basis under IRC §1022 will not apply to decedents’ estates with a date of death after December 31, 2009. Instead, IRC §1022 provides that the property acquired from a decedent shall be treated as transferred by gift. Therefore, when an heir sells the asset, he will be responsible for paying capital gains tax on all the gains that had accrued since the decedent originally acquired the asset.
Wednesday, May 13, 2009
In our prior post, we addressed the possibility of a life settlement as an alternative to taking the cash surrender value of an unneeded life insurance policy. Another alternative is gifting the policy to a charity and taking an income tax charitable deduction. The charity becomes the beneficiary of the policy and the ownership is transferred to the charity as well.
If you do not need an income tax charitable deduction and you do not want to part with the ownership of the policy, you can simply designate the charity as the beneficiary of the policy. Your estate will receive an estate tax charitable deduction for the death benefit passing to the charity.
Thursday, April 23, 2009
As universities feel the pinch of the recession, many of them are looking for sources of money to cover operational expenses. One important source is endowments. Universities love unrestricted gifts, because the money is theirs to use as needed to pay faculty salaries, financial aid, and other expenses. The reality is that most significant endowments are for a restricted purpose. For example, maybe the donor hopes that the money will be used to bring prominent speakers to the university. It might be that the donor enjoyed his experience at the college’s radio station and wanted to see it continue. Perhaps the donor gave expensive works of art for the university to display for future generations. By the way, these are real-life examples. See New Unrest on Campus as Donors Rebel, Wall Street Journal.
The donor’s intent is almost always expressed in writing, so what if the university needs it for another purpose? Should a university be able to use a restricted gift for an unrestricted purpose, or worse, should a university be able to sell the works of art or the radio station? If the university is in dire financial straits, it may have no choice; however, it should try to honor its benefactor’s intent. Donor unrest is never a good thing. You know the saying, “you should not bite the hand that feeds you”.