Have Too Much Money? ConGRATs

financeHere’s a little article for those of you with too much money. What’s my definition of too much money? Well, lets say you’re in retirement and have investment assets that will put you way over the top of the estate tax.

Lets say you want to minimize your estate tax but also want to maximize the amount of money you leave to your heirs. No matter what you do (short of putting your money in a couple of steel lined briefcases) you’re going to earn interest on your money, why not make the most of it and give it to your kids now?

Luckily for you, the IRS gives you just such a way to pass a fortune to your kids tax free! Its called a GRAT – Grantor Retained Annuity Trust. Well what does that mean and what does it do?

Here’s how it works, I’ll try to keep it simple.

You put money into this irrevocable trust (meaning you can’t take it back until its done) and select a form of annuity payments over a certain period of years (usually 1 or 2 years). The IRS has a set expected annual rate of return, what this means is that they expect your money to earn at least lets say 5% per year. That seems reasonable and easy to achieve. It is and that’s why GRATs are an excellent means of transferring wealth!

Take your money, put it in, and earn whatever you want based on your investments – 10, 11, 12%. So what happens at the end when the trust is done? Well a couple of things:

First, everything you put into the trust plus the 5% the IRS expects you to earn is transferred back to you, its back in your estate. Sorry, you can’t get rid of that so easy slick. However, the 5, 6, or even 7% extra that you earned above and beyond the 5% the IRS stipulated goes to your beneficiaries tax free! Let’s do the math.

The future value of $2,000,000 invested for 2 years with a rate of 12% will be $2,508,800. The future value of $2,000,000 invested for 2 years with a rate of 5% (the IRS assumed rate) will equal $2,205,000. Take the difference and you get $303,800. What does it mean? $303,800 just went to your heirs tax free. $303,800 of interest that you would have otherwise included in your estate is now out of it.

A couple of points to make about GRATs.

  1. If you die before the GRAT ends, it ends up back in your estate.
  2. If you earn less than the IRS rate, GRATs aren’t useful.
  3. You can keep doing one GRAT after another.

Taxes – The Power of our Spending

Ever wonder how much the government actually hauls in on all the things we spend our money on? How much does the government make from all of us drunkards buying alcohol? What about all that gas we guzzle, surely they want what’s best for us and make little off of it. Well, using the power of the interweb, I have compiled a list of interesting figures detailing exactly how much the government makes in tax revenue from our spend thrift ways. Thanks to the Tax Policy Center for providing me with these figures. If you want more in-depth numbers with your own state’s revenues, check out the tax facts page over at the TPC.

Now onto the list, all numbers are for the last data entry – 2005.

Excise Taxes

  • Alcohol – $5,145,120,000
  • Fuel – $35,769,931,000
  • Tobacco – $13,336,754,000
  • Telephones – $5,851,530,000

Other Taxes

  • Property Taxes – $335,678,019,000
  • Estate Taxes – $23,565,164,000
  • Gift Taxes – $2,040,367,000
  • Corporate Income Taxes – $307,094,837,000
  • Total IRS Collections – $2,268,895,122,000

Something interesting I found was the chart shown below. It details the corporate income tax as a percentage of GDP from 1946-2004. I’ve also modified it to show which president was in charge at the time. The shaded areas show recessionary periods, the red/green shows the presidential time line.

Answering Yahoo

Occasionally I go to Yahoo! Answers to read the questions that various users submit, mostly with personal finance. Unfortunately, there are a lot of dumb questions and a lot more questions about working from home (which can be as equally dumb). However, every now and then you get a gem that I like to try to answer. The following is a question that I feel many people can relate to unfortunately.

I have a large debt to the irs, a garnishment on my wages and at least another 10,000 in other debt. I was just laid off of my second full time job, although I am looking for another………… what services or other options do I have to fix these issues. Between the garnishment, and the irs debt I cant make it on just one job.

Sadly, most people can be insensitive and quickly judge this person for all of the wrong reasons. Of course, getting a job or stop spending would be the easy answer. For a person in this situation, that’s not the full answer.

First, wage garnishment isn’t pretty. According to the government, garnishment is usually ordered by a court and cannot exceed 25% of a person’s disposable income (net income). My advice on this would be to talk with the IRS and see if a more agreeable settlement option can be made.

At least in the state of Ohio, where I live, they offer a program to settle debt if you face certain conditions. These conditions are economic hardship or doubt of collectability. It’s always worth a shot to try to explain things from your point of view.

As for finding someone to help you with your issues, you should contact the NFCC – The National Foundation for Credit Counseling. They can put you in touch with local companies that provide credit counseling services. They would be more experienced with such issues that you have and could offer you better and more personalized advice than I can.