Monday, February 18, 2008

Avoid Inheritance Tax

I doubt anyone rich needs this advice, but in the United States it would be trivially easy to give an heir 2.5 million dollars tax free. Here's how it is done. In January of every year give $10,800 in cash or stocks to your heir to invest. Why this amount? Because it is $1,200 less than the annual limit for tax free gifts giving plenty of leeway so that a birthday or holiday gift does not mess one up later in the year.

If you are 30 and only expect to live to 55 this will mean, assuming 5% interest above inflation, that when you snuff it he or she will have 500,000+ in cash. Then you can give in your will $2,000,000 in cash or whatever to your heir without invoking the inheritance tax. Easy peasy. If you live to an unexceptional 75 you could give $1,823,793.56 and then the exempt amount for $3.8 million in total. With more heirs you could give more money. Your heir will have to pay tax on the interest earned from all the stocks, bonds, or whatever he buys to earn it in the intervening years, but avoiding inheritance tax is trivially easy. Provided the person with money is willing to think ahead about death and work on it in advance.

If the rich person is married it gets even easier because both husband and wife have a limit, thus $24,000 a year could be given away to each recipient under the current rules. Staying well clear of the limit gives $3,647,587.12 after 45 years, a reasonable assumption given that Mr. & Mrs. Rich would start to give the moment he or she is born. In the the irrevocable trust it goes and in the end he's got more money than most of us would ever know what to do with, almost completely tax free. And they can all do the same if he or she produces some Rich grandkids.

But if I were an immortal I would not do this to give money to myself. I've thought of a much better way than to keep farming identities and passing money on.

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