Stuart A. Bronstein <spamtrap[at]sbcglobal.net> wrote:
- quote -

OK, that keeps it under 100%, but still: the estate holding
a bunch of Treasury Zeros does a lot better than the estate
holding a bunch of future lottery payments, even though
their actual future cashflows are the same.

- quote -

Don't you mean estate tax?

- quote -

That's why I specified one payment, due in one year.
The reduction is small.

- quote -

Combined with state and city, over 50%.

- quote -

And that's why my example used large numbers, so most of the
money is in the high brackets.

Seth

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Seth Breidbart wrote:
- quote -

No. That would apply only if there were a basis step-up,
for which there isn't. Check the sections around IRC 1015
for details.

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David Woods wrote:
- quote -

However, note that its value under the AMT may be different
from its value under the regular tax system - depending on
what other IRD and 691(b) deductions are permitted.

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sethb[at]panix.com (Seth Breidbart) wrote:

- quote -

That's been answered - the full amount received with each
payment less the proportionate amount of estate tax
previously paid.

- quote -

First of all you pay income tax on the present value. For
payments due over 18 years at a discount rate of 3% that
would reduce the amount by half.

The highest federal tax rate at the moment is 39.6%. That
doesn't mean you pay that rate on every dollar, but only
each additional dollar. The exact total rate will depend
both on your status and your total income. There is also a
deduction allowed for state tax, which will reduce this
amount depending on those factors.

The top estate tax bracket at the moment is 46%. That rate
isn't paid on every dollar, but on each additional dollar
after a certain rate. The exact rate will depend on the
exact size of the estate.

Stu

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The whole idea of death after beginning to receive lottery
payments raises the issue of PLANNING.

Why is it that from January through April people are asking
how to properly structure last year's transactions to
minimize their tax burden? The answer is "They do not know
any better!"

Yes, the estate tax sucks. We all know that. The people it
hurts the worst are the people who don't know any better.
Maybe it should be considered bad practice to accept or to
continue clients who refuse to engage in tax planning.

If you win an annuity lottery, you need to contact a CPA
or an EA - plus an attorney - before you claim the prize.

A few years ago a man in Maryland won a huge amount in a
multi-state lottery, but did not claim it for a few months.
His reason: He was taking care of business; waiting for his
children's school years to end; and whatever else he thought
was necessary. He should be the poster child for PLANNING.

Dick

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aquariustutor[at]verizon.net says...

- quote -

The rules for every lottery I've seen state that the ticket
has zero value until it is certified as a winning ticket by
the lottery commission. Some lottery commissions will pay up
to 10 winners on a ticket, but if you have more than 10,
they require that you form a partnership (LLC, etc.) so that
the newly formed entity receives one check and then splits
up the money according to the p-ship agreement.

Considering the above, then my interpretation is that if you
want to distribute the lump sum among a few family members
then you should form a partnership before submitting the
ticket for payment. This way you might be able to split the
$100MM like this:

You $60mm
sister $10 mm
brother $10mm
Charitable foundation $10mm
The genius who laid out the scenario for you $10mm
(please make certain to spell my name correctly)

Gary

--
E-mail to the above address is rarely read. If you want to
contact me directly, please send an e-mail to: gary at
gdgoodman dot com.

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- quote -

That's been my question all along. What is the amount that
ordinary income tax is paid on?

- quote -

Federal estate tax rate 45%
State estate tax rates vary, say 15%
Federal + state income tax rate 50% (slightly higher in NYC)

If those apply to all the money, then the total tax rate can
exceed 100%. (Consider my example above, but the $20
million is to be paid in one year, so its present value is
$19 million.)

Seth

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- quote -

How did you figure this? If you pay 47% for estate tax and
35% for income tax on the remainder, you still have money
left over. That is less than 100% tax.

20,000,000 * 53% = 10,600,000 after estate tax.
10,600,000 * 65% = 6,890,000 after income tax.
Looks like a total tax rate of 65.55%.

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Stuart A. Bronstein wrote:
- quote -

You figure out how much estate tax was attributable to the
lottery payments, and then take a deduction on line 25 of
Schedule A as the payments are received. This deduction is
not subject to the 2% floor.

Simplifying the actual rules a bit, assume the $20 million
lottery prize (valued at $15 million on the estate tax
return) is payable at a rate of $1 million per year for 20
years and was responsible for generating $5 million in
estate taxes. Each $1 million payment would then receive a
corresponding $250,000 deduction on Schedule A.

The detailed rules for computing the amount of estate tax
attributable to the payments can be found in the regulations
covering income in respect of a decedent.

--Chris Ballard

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

Good question. My guess is that the recipient is considered
to benefit from the entire amount, whether some goes
directly to pay taxes from the IRA or it comes out first, so
it wouldn't matter. Remember that income tax is on the
recipient of the IRA funds, not the IRA itself.

Stu

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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

But the estate tax can be paid from the IRA itself, can't it?
Or does that also trigger additional tax because the money
"came out"?

Seth

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- quote -

Then the total tax rate can exceed 100%.

Seth

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Brian <user[at]sbcglobal.net> wrote:

- quote -

Someone mentioned that you can get a deduction for estate
tax paid. How does that work?

Stu

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Seth Breidbart wrote:

- quote -

Wrong. Please read about IRD.

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- quote -

All of it.

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David Woods <davidwoods[at]verizon.net> wrote:
- quote -

If the estate tax rate is 60% and the personal tax rate is
50% (e.g. NYC), then the overall tax rate can exceed 100% if
the estate tax is paid on the PV of the income stream, and
the income tax is paid on the full amount received.

Another way to look at it is to compare two cases.

1. Taxpayer died with a lottery annuity of $5 million/year
for 10 years (and nothing else) in his estate.

2. Taxpayer died with a bunch of zero-coupon Treasury bonds,
that will pay $5 million each year for the next 10 years,
in his estate.

Clearly, in case 2, estate tax is paid on the present value
of the bonds, and tax on IRD (or income tax if the bonds are
distributed to the heirs) is paid on the difference between
that present value and the amounts received.

Seth

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sethb[at]panix.com (Seth Breidbart) wrote:

- quote -

It seems logical. But that appears not to be the rule.
It's like inheriting an IRA. The entire amount is subject
to estate tax, and then it's again subject to income tax
when it comes out.

Stu

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

I found nothing definitive. But from what I've been able to
tell on brief research, the answer is yes. There will be
estate tax on the $15 million present value and income tax
on the entire $20 million as it comes in.

Under section 1014(c), stepped up basis does not apply to
income in respect of a decedent.

Stu

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"Gil Faver" <Rowdy'sboss[at]ND.com> wrote:

- quote -

It's pretty much basic math. Every state gets two senators,
and there are a lot of "more cows than people" states where
farmers are a strong lobby.

As for estates having to dispose of assets to pay estate
taxes, I believe that was the cover story of last month's
"Duh" magazine. Critics of the estate tax have never argued
that heirs should be able to print the money needed to pay
so they can hang onto that office building in Manhattan that
has such deep sentimental value.

Rather, they try to paint the estate tax as an attack on
closely-held businesses, usually stated as the (cue chorus
of angels) "small businesses that drive America", and farms,
neither of which has to be sold to pay estate taxes under
current law.

--
Phil Marti
Clarksburg, MD

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

The estate tax will be applied to the present value of the
future interest stream using applicable annuity tables.
There are many court cases covering this topic. So to the
extent you consider income tax on IRD on an asset estate tax
was paid on, yes it's double taxation. On the other hand,
there's also a pretty nice income tax deduction FOR that
estate tax paid on the IRD. Best part is, it's not subject
to 2% of AGI and isn't an AMT exclusion.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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