I came across an article about taxes that caught my attention a couple of days ago.
The US Treasury has a daily report on government transactions and on Feb 28, 2023, there was a deposit of $7 billion under the “estate and gift” tax category.
This is the highest collection of estate & gift tax since 2005. Just take a look at the chart below:
It may be possible that there was more than one tax payment. A Treasury spokesperson say this is not a reporting error.
The data above will also show us how effective estate & gift taxes are: They don’t seem to collect much. The big tax overhaul in 2017 (2017 Tax Cuts and Jobs Act) reduces the potential amount people have to pay for estate taxes but the collection since has soared, likely due to excess deaths of elderly during the pandemic.
After being exposed to estate taxes laws in a few countries, I realize that death tax and gift tax goes hand in hand:
This visualization above should help you frame things. If the government tax your estate so much when you pass away, what could you do to circumvent it?
Gift while you are alive!
So it is natural to tax large gifts as well.
This may be why death and gift taxes are treated together. It is a tax on the transfer of your stuff to others.
In a way, if the Singapore government wishes to implement some estate tax, it makes sense to also tax on transferring to individual and irrevocable trusts (trusts where beneficiaries cannot be amended). These transfers are more permanent. If it is a transfer to a revocable trust, then it should still be subjected to estate taxes, because technically, you will still have a lot more control over a revocable trust.
We always say that richer families will have ways to optimize their assets to minimize the taxes paid in a seemingly legal manner.
Thus, a sudden spike makes you wonder:
Did some family who procrastinated optimizing had a family member passed away during COVID?
We may never know but this article is a good personal refresher on some of these tax stuff.
But for those who invest in the US, and are not aware of possible tax liabilities, this is something to take note. If you own assets such as US-domicile listed companies, you may be subjected to estate taxes.
Read Guide to Estate Taxes for Singaporean Investors with Overseas Investment
The Possible Reasons Why the Estate Tax Was Paid
This tax bill is also surprising because of its sheer size and if someone that rich passed away, how can the public not know? Forbes does the tracking of these very rich individuals, and it is possible someone has slipped through the cracks.
A 40% estate tax may imply an estate of $17.5 billion but according to the Tax Policy Center, estates typically pay at a 17% effective tax rate only.
If only 50% of the estate is taxable, the potential value becomes $35 billion.
This will make the person one of the 100 richest people in the world.
1. Make a Taxable Gift Now to Avoid Higher Future Taxes
Make a $17.5 billion gift to heir, and pay a 40% gift tax of $7 billion.
Alternative: Passed away with an $24.5 billion estate, the estate tax will be $9.8 billion.
2. Gift Tax Triggered By Divorces to Spouses Without American Citizenship
Tax liability issues to consider for high-net-worth couples in divorce.
If a divorce has taken place and the spouse is a non-resident alien, the assets may be subjected to capital gain recognition.
The article gives some handles how the spouse getting the assets as part of the divorce should think:
- If the person transferring is US person and the receiver is a non-resident alien, then the asset is transferred on a stepped-up basis. This means the cost of the asset is step up to during the transfer, which reduces the capital gains tax.
- If the person transferring is a non-resident alien and the receiver is a US person, then the asset is transferred on a carryover basis and will have a built-in gain. Carryover means the value of the asset is the historical cost, which means a bigger capital gains tax.
- Possible additional withholding tax under Foreign Investment in Real Property Tax Act (FIRPTA) due to transfer of a U.S real property interest (USRPI). The non-resident receiver would need to pay 15% withholding tax on the “amount realized”.
- Understand how the assets are taxed in the U.S regarding income earned or capital gains current, and in the future.
- Understand how the assets are taxed in the home country of the spouse regarding income earned or capital gains current and in the future.
3. Delayed Payment for Death a Few Years Ago
Due to some enforcement efforts, the payments are only made today.
The typical deadline for estate tax filing is 9 months after the death.
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