I see that for this year and next year, the gross estate tax exclusion amount is $2,000,000, where amounts over this are taxed at a rate of 45%. Just out of curiosity, if one inherits stock when the decedent dies of say for example a value of $50,000,000. Before you sell it, the stock goes to zero, still leaving you with $21.6 million in estate taxes to pay, since your cost basis in inherited stock is the market value on the day the decedent died. Assuming you inherited nothing else, what happens in this case where you are now unable to pay the 21.6 million since the stock went to zero? What does the IRS do? I assume there is no maximum amount that one can pay in estate taxes?
Estate taxes
- Thread starter Vinny1
- Start date
http://www.fool.com/foolu/askfoolu/2002/askfoolu020220.htm
According to the above...
With an inheritance, you get what is called a stepped-up basis for tax purposes. Your basis (i.e., cost) is the fair market value of the stock on the date of death of the donor.
According to the above...
With an inheritance, you get what is called a stepped-up basis for tax purposes. Your basis (i.e., cost) is the fair market value of the stock on the date of death of the donor.
With estate taxes, you pay based on the amount you inherited at the time of the decedent's death. If it does go higher, you have a capital gain. If it goes lower, you have a capital loss. In my above example, you lost the whole $50 million, can only deduct up to 3,000/year in capital losses, but still have to pay $21.6 million in estate taxes.
Say you inherit 1,000,000 shares and the value is $50/share at the date of death for a total inheritance of 50 million. You would owe estate taxes of 21.6 million (48 million x .45). If the stock goes to zero before you sell it, how would you come up with the money to pay the 21.6 million, since now your whole inheritance has been wiped out?
Joe Robbie the previous owner of the dolphins and Joe Robbie stadium , never paid into an estate fund for his kids and when he passed away and left the team and the stadium to his kids; they were met with a huge tax bill which they didnt have the funds to pay it.. They had to sell the team and stadium to Huzienga in a fire sale ...
Again, it is the estate that would pay the tax, not you as the beneficiary. That being said, I think you will find that wills generally provide that taxes get paid first before the distribution of remaining assets. Thus, unless the estate has 20MM in cash to pay the tax, they would sell off enough assets to raise the 20MM. Therefore, they may sell all or part of the stock before conveying to you, thus avoid the going to zero problem.