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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM EST, Friday, June 8: Estate planning continues to fascinate. Your heirs have nine months to pay up after the last one -- you or your spouse -- croaks. (I incorrectly wrote 91 days.) You have basically four choices:

1. Pray Congress will do away with the Estate Tax or die in 2010. Good luck..
2. Give what you're allowed to your kids ($2 million per kid for spouse and you) and the rest to charity before or after your death via your will.
3. Put your assets in trusts over which you have no control. Be careful. That may create gift tax liabilities now.

4. Let your heirs pay the estate tax out of your estate. This means you'd better have some cash around.
5. 5. Buy insurance. For a $25 million payout upon the death of myself and my wife, thus covering estate taxes, I'm looking at one policy that involves a $2.23 million payment in year one and $231,493 annual payments over the next 19 years. After that no more premiums. That's a total of $6.63 million in premiums over 20 years to receive $25 million. I need my son to do an Excel on this. But it appears to me that the insurance company is expecting to earn around 8.8% a year on their monies over 20 years. If I expect to earn less (e.g. I invest in muni bonds), and/or expect to live a lot fewer than 20 years, I should go with the insurance. However, if I earn more and live longer, my estate will grow as will the tax bill to Uncle Sam. But I will still come out ahead. (That $25 million insurance payout will itself attract taxes. That complication is for another day.)

God's great invention: My father said God's greatest invention was compound interest. In honor of him I publish this chart. Put your money in government bonds at 5% or put your money in Berkshire Hathaway ... you'll be richer by 60 times with Berkshire. That's $67,999,758.49 divided by $1,129,802.14. Think that's fantasy? Try 15%, you'll be richer by 10.29 times.

Why yield matters
Current Principal
Annual addition
Years to grow
Growth Rate
End Value

Which is better for your cash? High yield bank CDs? Or short-term triple tax-free municipal bond floaters? It all depends on your tax rate. For me, muni bonds floaters are best. Here's why.

This week I'm getting around 3.57% on muni bond floaters that are exempt from Federal, New York State and New York City income taxes. But rates apparently are falling. So, in my calculations below I've used a rate of 3.48%. The first number is the federal tax rate. The second number is the New York state and city tax at that federal level. The final number is the equivalent before all taxes -- what I'd have to earn to come out ahead at the bank.

25% + 10.373%: 1.4876 multiplied by 3.48 = 5.1768%
28% + 11.625%: 1.5716 multiplied by 3.48 = 5.4692%
33% + 11.625%: 1.6889 multiplied by 3.48 = 5.8773%
35% + 12.150%: 1.7512 multiplied by 3.48 = 6.0942%

My bank is presently paying 5.19%. Hence I'm better off with muni bond floaters. But if you don't pay local taxes, your numbers would be very different:

25%: 1.3333 multiplied by 3.48 = 4.64%
28%: 1.3879 multiplied by 3.48 = 4.83%
33%: 1.5144 multiplied by 3.48 = 5.27%
35%: 1.5374 multiplied by 3.48 = 5.35%

Estate Tax Questions, courtesy the IRS

Most relatively simple estates (cash, publicly-traded securities, small amounts of other easily-valued assets, and no special deductions or elections, or jointly-held property) with a total value under $1,000,000 do not require the filing of an estate tax return. The amount was $1,500,000 in 2004 and 2005. For 2006 through 2008, the amount is raised to $2,000,000.

Q: What is the Estate Tax?

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of Cash and Securities, Real Estate, Insurance, Trusts, Annuities, Business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include Mortgages and other Debts, Estate Administration expenses, property that passes to Surviving Spouses and Qualified Charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2% of all Americans.

Q: When is the return due?

Generally, the estate tax return is due nine months after the date of death. A six month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.

Q: I own a 1/2 interest in a farm (or building or business) with my brother (sister, friend, other). What is included?

Depending on how your 1/2 interest is held and treated under state law, and how it was acquired, you would probably only include 1/2 of its value in your gross estate. However, many other factors influence this answer, so you would need to visit with a tax or legal professional to make that determination.

Q: What is excluded from the Estate?

Generally, the gross estate does not include property owned solely by the decedent's spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate (but taxable gifts are used in the computation of the estate tax)....

Q: What deductions are available to reduce the Estate Tax?

1. Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction.
2. Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
3. Mortgages and Debt.
4. Administration expenses of the estate.
5. Losses during estate administration.

Q: What is "Fair Market Value?"

Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.

Q: What about the value of my family business/farm?

Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms or businesses operated as a family farm or business, reductions to these amounts may be available.

In the case of a qualifying Family Farm, IRC §2032A allows a reduction from value of up to $820,000.

If the decedent owned an interest in a qualifying family owned business, a deduction from the gross estate in the amount of up to $1,100,000 may be available under IRC §2057.

Q: What happens if I sell property that I have inherited?

The sale of such property is usually considered the sale of a capital asset and may be subject to capital gains (or loss) treatment. However, IRC §1014 provides that the basis of property acquired from a decedent is its fair market value at the date of death, so there is usually little or no gain to account for if the sale occurs soon after the date of death. (Remember, the rules are different for determining the basis of property received as a lifetime gift).

Protection from electrical storms:

Dear Harry,
My lucky friend Peter Vernon lives in the Loire Valley in France. His Mac burned out with an electrical storm electricity surge. They many wild electrical storms. What should he do?.

Dear Peter, You should install decent surge arrestors (e.g. Panamax) between your wall and your machine. But no surge arrestor will protect you from a direct lightning hit. My recommendation remains: Unplug all valuable stuff and wait out the storm.

For the neighbors:

For a bargain:

French Open Tennis TV Schedule: Tennis moves to NBC this weekend.

Time (EST)
June 8
10:00 AM - 1:00 PM (Live)
Men's Semifinals
June 9
9:00 AM - 12:00 PM (Live)
Women's Final
June 10
9:00 AM - 2:00 PM (Live)
Men's Final

Grandma's Birth Control Pills
After working most of her life Grandma finally retired. At her next checkup, the new doctor told her to bring a list of all the medicines that had been prescribed for her. As the young doctor was looking through these, his eyes grew wide as he realized she had a prescription for birth control pills.

"Mrs. Smith, do you realize these are BIRTH CONTROL pills?

"Yes, they help me sleep at night."

"Mrs. Smith, I assure you there is absolutely NOTHING in these that could possibly help you sleep!"

She reached out and patted the young Doctor's knee. "Yes, dear, I know that. But every morning, I grind one up and mix it in the glass of orange juice that my 16 year old granddaughter drinks... And believe me, it helps me sleep at night."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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