Seth Breidbart wrote:

- quote -

NO.

- quote -

NO.

- quote -

YES.

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David Woods, EA, ChFC, CLU <dwoods[at]woods-financial.com> wrote:
- quote -

So the remaining lottery payments can have a negative value,
since the estate taxes are based on the time-discounted
total amounts received, and the full amounts are taxable
income when received? (I'm assuming that both estate taxes
and total state+federal income taxes can exceed 50%.)

Seth

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Seth Breidbart wrote:

- quote -

Nope. It's still IRD. You might get the deduction for
estate taxes paid, if that makes you feel any better.

- quote -

Unless it distributed the contract out to the beneficiaries.

Phoebe

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NadCixelsyd wrote:

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In this case, the estate's only real option is borrowing the
money to pay the estate taxes (the interest paid will be
deductible as an administrative expense if there are no
other liquid assets in the estate). Alternatively, the
estate could sell the lottery income stream to turn the
future payments into current cash (not always allowed under
state law, and usually the discount rates are very steep).

When the annual payments are received, they will be taxable
to the recipient as income in respect of a decedent under
Code section 691. To soften the blow a little bit, the
recipient should be eligible for a deduction under 691(c)
for the estate tax paid attributable to the IRD property.

--Chris Ballard

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Dick Adams <rdadams[at]smart.net> wrote:
- quote -

George's estate holds a contract for the right to receive $1
million/year for 16 years. Its value is $10 million.
Estate tax is paid on the $10 million (worry about how,
later). Doesn't that give the contract a value of $10
million, so when $16 million is received (over time), $6
million is taxable, and $10 million is considered inherited?

Suppose there were 1 year remaining, with a $10 million
payment. The estate has enough cash to pay its taxes.
Since tax was paid on the $9.5 million value of the
remaining payment, isn't $9.5 million inherited and
therefore non-taxable when received?

Or does the estate have to stay open until all payments are
received, paying tax on IRD as the lottery money comes in?

Seth

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Dick Adams wrote:
- quote -

See the last case (No Marketability Discount for Lottery
Winnings) discussed at the following AICPA site.
http://www.aicpa.org/pubs/jofa/nov2005/taxcases.htm

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rdadams[at]smart.net says...
- quote -

The eminent Dick Adams wrote: "Turning ordinary income into
capital gains requires a minor miracle."

I say, either a minor miracle or an accounting firm selling
a tax shelter.

In the stated question, it's ordinary income when the checks
are received. My guess as to the treatment on an estate
return depends on the rules of the lottery. Payments may
stop upon death of the winner. It's usually best to take the
lump sum. The lottery commissions pay the first payment, but
then buy an annuity from an insurance company or the like.
The annuity usually looks for a very conservative return on
investment so that the insurance company (or whomever) is
certain to make the payments and a profit.

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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"NadCixelsyd" <nadcixelsyd[at]aol.com> wrote:

- quote -

There is no basis in this annuity, death or no death.

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

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NadCixelsyd wrote:

- quote -

The lottery is not an annuity. There is no basis in the
lottery even after it goes through the estate. It is 100%
ordinary income, IRD.

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NadCixelsyd wrote:

- quote -

This is a very real problem. It has to have been addressed
in the past, but I've not seen any case law on the subject.
It would be interesting to find the written IRS policy on
this issue.

- quote -

Not true. It's ordinary income no matter how you cut it.
Turning ordinary income into capital gains requires a minor
miracle.

Dick

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"NadCixelsyd" <nadcixelsyd[at]aol.com> wrote:

- quote -

That's why when I win I'm taking the reduced lumpsum.

- quote -

The estate easily gets an extension of time to pay, complete
with, as I recall, a reduced interest rate.

Your other question is beyond my pay grade, but I assume it
involves income with respect to a decedent.

--
Phil Marti
Clarksburg, MD

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George wins the lottery and it pays $1 million per year for
20 years. I assume $1m is income to George whenever he
receives a check. Four years into the 20 years, George
dies. He has no assets other than the remaining lottery
annuity. Because of the time-value of $$$, the remaining
$16m annuity is valued at $10m at the time of his death.
How can the estate pay any estate tax if there's nothing
until the next annual payout?

Slighty modification: George leaves the annuity to his
wife, Betty. Does Betty inherit the basis of $10m. Therefor
most of the proceeds are return of capital and therefore not
income? Would this be any different if George had left the
lottery annuity to his son, Paul?

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