Yes, i give away abt $200k per year that way. But to do a million takes 5 years and when stock goes up $140k per day, you are losing the race.
CRAT works much better but with some expenses and limitations. And it consumes my gift tax exemption for the 11 heirs for 20 years.
Not exactly. It gifts the non-changeable amount that you have it set up for annually, so if you have 11 beneficiaries and give $18k a year to each one, it will give out $198k a year for 20 years. If the gift tax exemption goes up $1k a year for the next 19 years (it won’t, but just for illustration), then in year 2, you will still be able to give an additional $1k per beneficiary, or $11k; in year 3, $2k per beneficiary, or $22k; etc. until in year 20, the gift tax exemption will be $37k, but your CRAT will only be giving out $18k per beneficiary, and you can still give an additional $19k per beneficiary, or another $209k.
So if you want to fully take advantage of the gift tax exemptions, you are still going to have to give additional money each year after the first increase in the exemption amount after you set up your CRAT.
AJ
Yes, good point. And if certain politicians get elected there could be major changes in estate taxes–maybe even eliminated. Or other folks might let Trump law expire cutting fed estate tax exemption by half or even make it worse by capping or taxing stepped up basis.
Its a risky time to do anything as laws may change soon. But when you get to million dollar estate tax liability (or more) all this does get your attention. Better to take care of it if you can rather than let heirs take big hit.
Between the annual 0.65% administration fee, and the additional fees and commissions, you are probably signing up to pay at least 1% a year in fees for 20 years. 1% a year on $10MM for 20 years is $2MM
AJ
The CRUT i was looking at was 0.45 plus 0.25 for administration. I calculated close to $400k. But comes out of charity remainder, not from heirs. It does reduce my charitable deduction.
I have pointed that out to the charity. People like Vanguard or Fidelity can run an index fund for 0.07%. You would think they could manage an endowment fund for double that. And $3k per year for administrative cost seems fair. But of course changes are not likely. Take it or leave it.
How’d you calculate that? $400k/20 years is $20k a year. $20k at 0.7% a year means that you’re only putting $2.85MM into the trust - we’ll round that up to $3MM
If you’re looking at a $1MM estate tax, that means that your estate is at least $16MM, so you’re only decreasing your estate to $13MM, giving you a $0.6MM buffer in hitting the estate tax limit, which will be wiped out by just 4 days of the increase you cited. So you are likely right back to owing estate tax again if you’re only putting $3MM into the trust.
And that’s assuming that the current estate limits are extended. Under current law, the limits will be approximately halved in 2026. Assuming anything other than current law is magical thinking. That means, to give yourself a buffer in order to completely avoid estate tax, you probably need to put at least $10MM of a $16MM estate into a CRAT or CRUT.
0.7% on $10MM is $70k a year, or $1.4MM over 20 years
Additionally, a CRAT is required to have an annual distribution that is at least 5% of the initial value, or $500k if the starting value is $10MM. $500k divided among 11 beneficiaries is $45.5k a year - well over the gift limit, so you will be paying gift taxes.
With a 5% minimum distribution, 11 heirs at $18k a year, you can put a little less than $4MM into a CRAT. That will only get your estate down to maybe $12MM, meaning that under current law, you will be subject to estate tax beginning in 2026. And even if the current limits are extended, if your estate grows at a net 7% a year compared to the bracket inflation, it’s only going to take 2 years for your estate to be subject to estate tax again, and in 5 years, you’ll probably be looking at $1MM in estate tax again.
With your size of estate, unless you give substantially all of it to charity, not to your relatives, I don’t see how you are going to avoid paying either gift taxes or estate taxes, even by using a CRAT or CRUT. In order to reliably avoid estate taxes, you have to put so much into the trust that you will pay gift taxes on the distributions. But if you only put in enough so that the distributions don’t exceed gift limits, you aren’t pulling enough out of your estate to avoid estate taxes.
Maybe you need to find more beneficiaries?
AJ
If your stock goes up $140k a day (about $5 a day per share) then in 5 years the company will be worth about $126T, more than the entire US GDP, the entire US stock market, and the entire world stock market … combined. So giving away 11 * $36k a year might just do the trick. And won’t use up any of your unified gift+estate tax credit (at least under current law).
This might be the one part that makes sense. If you do it all now, you can use the very large unified credit now before it [likely] becomes much smaller in 2025. But I still think that if you have 20 years, you can also accomplish most of the task with 11 * $36k a year.
@pauleckler has mentioned before that he’s not married, so he can only give $18k a year per beneficiary, not $36k like a married couple can. That’s why he’s only giving ~$200k a year (11*$18k = $198k), instead of ~$400k a year.
@pauleckler has said that his estate would be subject to a $1MM+ estate tax. To generate $1MM in estate taxes requires that the estate be at least $2.5MM ($1MM/0.40) over the estate tax exemption limit. Given that the current estate tax exemption is $13.6MM, that means that his estate is currently at least $16.1MM
20 * $18k * 11 = $3.96MM Even if the law is changed so that exemptions are based on the current levels, that’s not going to solve the issue for a current $16.1MM+ estate that apparently consists of a lot of stock, since stock typically grows at 10% a year (even more if it’s NVDIA in recent years) and the inflation rate for the exemption amount typically averages 3% (or less, now that it’s the chained inflation rate)
@pauleckler or his estate has some type of significant tax bill in his future - capital gains taxes on highly appreciated stock, gift taxes on gifts he gives his beneficiaries, or an estate tax on the amount over the exemption amount in the year he dies. A CRAT or a CRUT may decrease these bills, at the cost of paying fees to the administrator. A DAF could also help do the same thing for money he wants to leave to charity, but would not give money to his other beneficiaries.
It’s definitely a first world problem.
AJ
Re: Unified credit. Charitable remainder trust itself is exempt from gift tax. But payments to beneficiaries other than self or spouse (or 501c3 charities) are subject to gift tax when over the $18k annual gift tax exemption (or whatever it becomes in the future–currently indexed to inflation).
On $36k, not available to me as i am single. Most trusts are for family. Charitable Remainder Trust is one of the few available for singles. To get to $200k i’m already gifting to multiple generations. But no spouse to double amounts.
I’m not planning on paying estate tax any time soon but surprises do happen. And million dollar liability is a concern. Too many put it off too long and get caught with big bill. I’m trying to take care of it.
Re: Nvidia value.
This has happened to me before but before i sold too soon. Nvidia is not the big one that got away. I managed to keep nearly all of it. And now worth big numbers.
Yes it goes up when people decide to buy. Fortunately i don’ t have to make that decision. Holding on for dear life. Funny money. Can’t spend it all. Rather take care of family. Dirty paper. You can’t take it with you.
I see Nvidia as a well managed industry leader. A true growth stock likely to continue growing for a while. Earnings due Nov 19. Expected to be up a bunch. Either share price rises or PE falls. I can’ t see PE going less than Apple which is already maturing.
CRAT is a way to capture some of that gain. But planning to keep most of it. Plan is use Apple stock to fund much of CRAT. To me less growth potential.
You’ve implied that NVDIA is your most appreciated asset, and here you say that it has more growth potential than APPL, so you’re going to use APPL to fund the CRAT, therefore keeping the NVIDIA in your estate.
How do you think this is going to keep your estate from paying estate taxes in the future? Seriously, if you have highly appreciated stock that you think has higher growth potential, that’s the stock that you want to shelter.
AJ
I was fortunate to purchase some Microsoft in the 80s. My sister was a programer there - no great stock picking on my part.
With this back ground, I suggest stuff happens to growth stocks. They go up until they don’t. Even after the wild growth at MSFT ended, it was clear Windows and Office were corporate standards and there would likely be a lot of profit to fund dividends. This provided something to cushion Balmar’s screwup about the internet.
With all your concerns about paying taxes, have you given sufficient consideration to how you would feel if the price fell more than 60% in a few months? How about if it did not return to its previous high for 8 or 10 years? What if it turns into an Intel?
Worded more succinctly, there are things worse than taxes.
Good point, GW. Yes, i know that might happen. No, 60% decline won’t affect my lifestyle. Might disappoint my heirs and the tax man.
Good companies know how to reinvent themselves and continue to lead. Just as Microsoft became a leader in cloud computing. Apple now does very well with iPhone but have long string of winners. Mac, iPod, iPad, Apple Watch, etc. Innovative companies continue to innovate. Repeating homeruns is a challenge but most can be happy with a steady stream of singles and doubles.
Diversification or rebalancing is a good solution to this problem. But the tax bill will be over $1MM. No hurry for that.
And note that Nvidia is not way over valued. Forward PE is abt 40. Not bad for a growth stock.
Reported PE for previous four qtrs is not suitable for a growth stock. I usually multiply last qtr by 4 to estimate future earnings. And often you are not out of line to add 30% for anticipated growth.
That kind of explains why he can’t get rid of money fast enough! #kidding
It really does help to be able to give $36k/yr instead of $18k a year. But again the principle still holds that giving [a rising] stock instead of cash away at $18k a year to 11 people will dispose of MUCH more money over time than most other strategies.
I suspect that most people don’t estimate their estate TODAY, unless they are imminently in danger of death (like from a dread disease). Most people estimate it in the future, usually projected out to their own estimated lifespan, taking average lifespans, family history, and individual health profiles into account. So I suspect that this is an estimate into the future. Furthermore, the evidence shows that this is probably true because a $140k move on a ~$5 up day comes to about 28,000 shares, which implies about $4M in the stock. But even from $4M, removing $198k a year isn’t quite enough, and if it keeps growing at good rates, it’ll surpass the $13.6M unified credit. Furthermore, that credit will likely drop precipitously in 2026 (when the TCJA tax law expires, have I ever mentioned how much I hate expiring tax law?). So it might (MIGHT) make sense to take advantage of as much of the $13.6M today (between now and end of 2025), because when it drops you won’t be able to do so, but if you’ve already used it, it won’t be clawed back under new tax law. However, as we’ve all seen over the decades, tax law changes periodically, and there’s no way to know that there won’t be further changes that change the unified credit for the better in the future.
You know that can be changed! See above. #againkidding
Re: sheltering high growth stock.
I am in discussion w attorney abt creating trust. How do you shelter a high growth stock? Irrevocable trust pays high tax rate and you give up stepped up basis. Also no say in mgt.
Crut effectively means selling a chunk but w no capital gains. Proceeds reinvested increasing payments to beneficiaries well beyond assets contributed to the trust. Counting savings on capital gains and estate tax added funds to beneficiaries and tax deduction i estimate $2 in benefits over the life of the trust for each dollar contributed. The best payout i have been able to find.
I’ve talking about the CRUT for over a year. Initially intended to reduce estate well below the $13.61mm to allow some breathing room while we see what happens with $13.61 exemption falling by half end of next year.
And note for married couple that number is double to $27.22mm. I would have no worries for a while. (But do hope to double assets over next 20 years.)
Attorney advised to wait for election results. Will probably know of plans and composition of Congress soon after. More details at State of the Union Address early Feb. Then action expected first 100 days.
If it looks bad for estate taxes mad scramble expected mid-year. It may take months to get appointment with attorney.
I have a for fee certified financial planner identified and have an appointment in mind soon after the election.
The most likely outcome is still more or less 50/50 divided government. That means that nothing much can happen in 100 days or even 365 days. To me that means that the tax law will indeed expire with one of two outcomes:
I don’t see any large changes in tax law for 2026 arrives.
I somewhat disagree with the post just above. A lot can happen and there are so many unknowns. I do think if Harris wins, there’s almost zero chance that the $13M estate tax exemption remains. And if Trump wins, there’s an 80% chance it remains. And if, unexpectedly, the Democrats win all 3 branches, there’s zero chance that even the scheduled $7M estate tax exemption remains.
Given that he posted this (along with other hints in prior posts):
I suspect that he’s looking at the current potential estate tax. And I would question your assumption about “most people” especially since “most people” don’t have to deal with the estate tax. And those that do have to deal with estate tax are probably risk aware enough that they realize they could be dead tomorrow, even without having a dread disease.
Except NVDIA isn’t his only holding. He talks about funding the CRUT with APPL, so at a minimum, that would also be in a taxable account, and he’s talked in other posts about Roth conversions and QCDs, which would indicate he also has tax advantaged accounts.
Yeah, I think that makes sense, not only because it can’t be clawed back, but that he can also view his gifts being used by both his beneficiaries and the charities he gives to. He may also be able to provide input on the use of his gifts.
Nothing other than the looming debt crisis that the US government is going to have to face at some point.
AJ
It only matters partially who wins the presidency; more important is the Senate, you would need a hefty majority in the Senate to “fully” enact the desired plans of either party. The House is a little more flexible in that it is easier to “bribe” members (via projects in district, etc) to get enough Representatives from the other party to vote with you on important legislation.