Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 3
I have a question that I’d appreciate your input or thoughts.
What, realistically, is the chance/risk Berkshire holdings could result in a large, forced capital gain for us—years down the line post-Warren?
In doing estate planning, I’m looking at possibility of gifting low basis Berkshire shares to my son to remove from my estate—part of overall strategy to reduce my estate taxes. This would be a limited number of shares..my son has no intention or (hope) presumed need to sell before he then left shares to our granddaughters with basis step-up
I understand the real life family risks here—but the one risk I can’t quantify is THIS. I’m ok with a distribution from a subsidiary holding here and there, even a large one (which I fully anticipate btw at some point in the next 50 years).
This only works as a generation skip….because my son otherwise would inherit shares with step-up and they are very low cost basis. But inheritance tax is 16% here at the margin—so moving this stock plus its appreciation over maybe 20 years would reduce estate tax by a few hundred K
Has anyone else looked at this essentially generation skip strategy? Or are you, unlike me, not stupid enough to live in Massachusetts and have no need :)
No. of Recommendations: 1
"Has anyone else looked at this essentially generation skip strategy? Or are you, unlike me, not stupid enough to live in Massachusetts and have no need :)"
two comments:
1) I think the step up basis as an ongoing standing tax preference will go away within the next 10-20 years. Medium probability.
2) Boston & Massachusetts are great. Perhaps establish a 6 month residence in a more tax / estate friendly state. I did.
No. of Recommendations: 1
Appreciate the advice. I looked at going to a tax free state 183 days or more but the frictional costs of doing so are massive and to me not worth it imo. Plus I don’t want the relocation headaches.
Step-up going away only ENHANCES my strategy as it makes it a slam dunk avoiding estate tax with little downside.
Plus a huge unforeseen risk with the relo strategy— and I’ve seen this play out twice with people I know: Husband dies —wife wants to go back home near family and friends with fat estate tax. Strategy killed.
No. of Recommendations: 5
"Step-up going away only ENHANCES my strategy as it makes it a slam dunk avoiding estate tax with little downside."
I can't avoid the estate tax given my situation. But I am ok with it since everything over the limit just goes to my 3 designated charities.
Relative to the step up, I have begun gifting my kids and grandkids early.
No. of Recommendations: 3
In doing estate planning, I’m looking at possibility of gifting low basis Berkshire shares to my son to remove from my estate—part of overall strategy to reduce my estate taxes.
A few comments and I will assume USA in this case.
You can only gift (without using some of your estate tax exclusion) up to $19,000 a year, and your spouse can gift another $19,000, and if your son is married, you can each gift another $19,000 to his spouse, for a total of $76,000 a year. That is about 160 B shares at current prices.
However, as you gift shares over the years, you lose the basis step up at death on those shares. While marginal capital gains tax rates are lower than marginal estate tax rates, they aren't that much lower.
What, realistically, is the chance/risk Berkshire holdings could result in a large, forced capital gain for us—years down the line post-Warren?
This is a very interesting question. A few years (decades?) ago, Microsoft suddenly declared a "special dividend" which caused many people to have a sudden big bump in taxable income that year. That could happen with Berkshire, but it isn't likely, I'd put the odds of that happening sometime in the next 15 years at 10-20%. In general, Berkshire likes to be as tax efficient as possible (much like Liberty), and if they decide to distribute some value directly to existing shareholders, they would attempt to do it in a tax efficient way (usually via a tax neutral spinoff of sorts).
Of course, post-Abel, who knows? Maybe Wall Street types will take over the company and wring every last current dollar out of it via various types of distributions with hardly a thought to tax efficiency. This ("bad management") is the biggest risk at ALL large companies. It's funny, but they never list that as a risk in their SEC filings, even though it is indeed the biggest risk of all.
my son has no intention or (hope) presumed need to sell before he then left shares to our granddaughters with basis step-up
Why bother giving the shares to your son in that case? Just give the shares directly to your granddaughter, and your son can use his own estate tax exemption for the remainder of his money. If you're worried about tuition grant/loan eligibility, if your level of wealth is high enough to be meaningfully affected by the estate tax, she won't be eligible anyway. Instead, gift her shares each year, and when tuition payments are required, make those payments directly (that isn't included in the annual gift limitation).
Or are you, unlike me, not stupid enough to live in Massachusetts and have no need
I don't see the problem. Just because you live in MA doesn't mean that you have to die in MA. Just move to FL a few years before you die as so many people regularly do.
No. of Recommendations: 5
Thanks so much for that thoughtful response--much appreciated! Let me comment on my situation personally.
The Berkshire Gift to my son would be a tiny fraction of the lifetime exclusion. That's not at all an issue.
MA may be a nightmare state for taxation-- except for 1 tiny exception: it allows unlimited gifting with zero tax consequence
Giving the shares to my granddaughter? That defeats the strategy. You prolong the period to get the step-up by probably decades. Then she needs to die to get the step-up. If I give the shares to my son--when he dies--my grand-daughter gets the shares with step-up
Glad you agree the question of a very substantial forced tax event post Buffett is not inconsequential. I think the odds are higher than you infer because I think Abel will put his imprint on the business in ways that, well, are his--not Warren's. I'm hoping Berkshire considers tax free spin-offs over very large subsidiary sales, but hey, there are worst consequences than having to pay some tax at a future date on a gift from dad, right :)
And I hear you on moving to a tax-free state, but I've seen too many times when a couple does that, one person dies, the other wants to come home to other family members and plan is killed. But great idea if it works --a huge money saver!
OTOH the estate tax on Berkshire holdings IS substantially lower in every estate tax state for people who pass this spring --compared to passing last spring. It's just not my preferred method of lowering the bill.
No. of Recommendations: 5
And I hear you on moving to a tax-free state, but I've seen too many times when a couple does that, one person dies, the other wants to come home to other family members and plan is killed. But great idea if it works --a huge money saver!
For people that are deep enough into the estate tax brackets to matter, usually when the first spouse dies, they don't take the default option and simply allow the money to flow entirely to the surviving spouse. Instead what they do is at the first death, they use the first estate tax exemption to it's fullest extent and have the money distributed, usually via a series of trusts, to assorted family members (and sometimes charities). That way, the full exemption is used (perhaps living in FL at that time), and even if the surviving spouse moves back (or makes other financially unwise decisions), at least a good portion (about half) of the money has already been "protected" (both tax-wise and distribution-wise) to whatever extent possible.
The more typical scenario is when the surviving spouse remarries and eventually whatever money is to be distributed quite often gets distributed in ways that the original spouse didn't quite want. Plenty of nightmare stories like this one.
