This week, we'll answer questions about the alternative minimum tax and shorting against the box. But we'll start with something a little unusual: A reader wants to know how to give away her plantation.
I know. Frankly, my dear, you just don't give a damn.
But read on anyway. You'll be glad you did. And send any other questions you may have, along with your full name, to
Giving Away Tara
I have an incredible estate tax question. How does one pass on a plantation held in the family since 1758? It has 1,900 acres and is worth at least $1 million. Since I'm an orphan only child and plan to have no family, I wish to pass it on to the caretaker of the property and son. However, I am concerned about estate taxes. I had even considered marrying the caretaker for a year or so and giving the property in a prenuptial agreement! Have any better ideas for passing it on without an intense tax burden? P.S. This is not my only asset. I own some property locally and have a large stock portfolio. My biggest concern is that the property goes to someone who will take good care of it. There are five pre-Civil War buildings on it. -- Diana L. Blaisedale
My mother always told me to marry only for love, not money, but we never discussed what to do in the case of a plantation.
First, I'll assume you live on the plantation. I'll also assume the plantation is not a working farm. The farm rules are beastly, so I won't go there today.
In simplest terms, you have a lifetime gift-tax exclusion of $650,000, says Richard Van Benschoten, a senior associate at
Cowen Financial Group
in Manhattan. The exclusion will gradually increase to $1 million per person by 2006. That means you can give away that amount of money gift-tax-free in your lifetime. (For more on the gift tax, check out this
So if you just left the plantation in your estate, the first $650,000 would be excluded from estate/gift taxes if (God forbid) you died today.
Presumably, you expect to live a lot longer, so you may want to consider a qualified personal residence trust, or a QPRT, suggests Sandy Schlesinger, partner and chairman of the wills and estates department at
Kaye Scholer Fierman Hays & Handler
, a New York law firm. A QPRT is an irrevocable trust (that means you can't change it) that allows you to give your home -- or plantation -- away at a discounted price while you're still alive.
Basically, you transfer the plantation to the trust for a determined number of years, let's say 10, and retain ownership. The value of the plantation is discounted over those years. When then trust expires, the house is worth much less than the $1 million you believe it is worth today.
Let's assume that at the end of the trust's 10-year life, the discounted value of the plantation will be $500,000. You can then give the plantation to the trust's beneficiary -- your caretaker -- without owing gift tax. And, as the recipient, your caretaker would owe nothing unless he sold the plantation.
"The problem here is if you die before the life of the trust, the plantation goes right back to your estate," notes Schlesinger. Then you're back to square one.
So speak with an attorney who specializes in estate planning.
I'm a bit confused about your recent article on incentive stock options and alternative minimum tax. First, when exercising, I have to pay tax on "income," the difference between exercise price and the stock price on the date of exercise. Then, when eventually selling the stock (assuming long-term capital gain), must I pay tax on the difference between the sale price and exercise price or the sale price and stock price on the date I exercised? If the former case is true, it seems to be double taxation on the difference between exercise price and stock price on the date of exercise. Or am I very confused? -- John Andrews
Your question assumes you fall into the AMT world.
Think of AMT as a separate tax system. You must compute your tax bill under the "normal" system and then again under the AMT system. Your final tax bill becomes the higher of the two. (Read this previous
tax piece on AMT and ISOs for more details.)
Many people don't have to worry about AMT. But if you have exercised incentive stock options, you should start worrying. The difference (or spread) between your ISO's exercise price and the stock's market price on the day of exercise is a so-called preference item. That means it must be considered taxable income for AMT purposes.
If the spread is large enough so that you have to pay the AMT amount instead of the "normal" tax amount, you'll have to pay up by the April 15 following your exercise. But that extra tax money you must pay will come back to you in the form of a tax credit when you sell your exercised shares.
You still will owe capital-gains tax on the difference between the exercise price and the sale price on the day of the sale (assuming you held the shares for two years from the grant date and one year from the date of exercise).
But don't forget about your AMT credit. Hopefully that credit will wash out your capital-gains tax. So there should be no double taxation. It's really important to run some what-if scenarios before you do anything, though.
(Remember, if you do not fall into AMT to begin with, you will not owe tax when you exercise. You only will owe when you decide to sell your shares.)
Shorting Against the Box
I enjoyed your July 31 discussion of shorting against the box. I have a few related questions. You define shorting against the box as "you lock in profits on a stock you already own." But what if you go long on a stock and establish a separate short position on the same stock at the same time? Say seconds separate the two transactions. Technically, this would not be shorting against the box, at least reading from the above definition. If so, you should be able to sell your losing position at some time, realizing capital losses. Then either you hold on to your winning position until the next tax year, or if the naked wining position turns sour, you can sell it at a loss, realizing more capital losses. You would do this, of course, if you were looking for capital losses to offset capital gains elsewhere. Does the above scenario work? Or am I missing some important points? Also, are there restrictions for holding periods? For instance, if I sell both short and long positions with losses within 30 days, is there a wash-sale rule? -- Robert Vago, Ph.D.
I ran your strategy by Ted Tesser, trader tax specialist and author of
The Trader's Tax Survival Guide
If you go long on a stock and establish a short position on the same stock seconds later, you're still short against the box. You own the stock.
But that doesn't mean your strategy won't work. "You just need to be cognizant of the wash-sale rule," reminds Tesser. (Check out this
story for details about the wash-sale rule, but note that if both positions are sold by Dec. 31 and are not repurchased 30 days into the new year, you'll have no wash-sale worries.)
In addition, make sure you meet the
constructive sale rules. These rules require that you close your short position by the 30th day after the end of the tax year. Then, beginning on the day the short position is closed, you must hold the original long position for at least another 60 days. If you do not meet these rules, you will have to report a sale of the long shares as of the day you entered the short position.
"Other than that, it is a perfectly logical strategy," says Tesser.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
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