Tax avoidance and estate planning ‘for the rich’?

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slalom
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Tax avoidance and estate planning ‘for the rich’?

Post by slalom » Tue Sep 17, 2019 4:21 am

I realize this is a vague request but there is always a lot of discussion in the media and punditry about how the super wealthy can hire teams of lawyers to accumulate more money via avoiding taxes and shielding assets etc. but I never see any in-depth discussions about what it is exactly they’re doing that is so out of the question for, say, your average two-income professional family.

Beyond setting up a trust (typically only a few thousand dollars to set up) what are all these super secret/expensive ways the rich are supposedly getting away with things via ‘teams of lawyers’? What are some of the strategies actually being employed and why can’t a typical boglehead do them?

livesoft
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by livesoft » Tue Sep 17, 2019 5:31 am

Not so secret, but here is one:
How a ... Tax Break to Help Poor Communities Became a Windfall for the Rich

Typical Bogleheads don't have enough money and are not super wealthy.

The average two-income professional family should retire well before they become super wealthy, say in their 40s or 50s.
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Wricha
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Wricha » Tue Sep 17, 2019 5:46 am

The super wealthy can create different corporate structures that allow them certain advantages based on those corporate structures. These structures allow them to account for expenses and place assets strategically. One example that I am confronted with now is IRMMA. Although not technically a tax it operates the same way. Because of investments including muni bond interest after 65 I am required to buy Medicare and pay an addition $6k a year above what most people pay for part B and D. I am not allowed to buy private insurance. Our healthcare insurance under Medicare is now over $20k this year, last year at 64 it was under $10k. Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M. It is near impossible for me to set up a company hire 20 employees and buy health insurance through this structure at this stage of my life.

Leesbro63
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Leesbro63 » Tue Sep 17, 2019 5:57 am

Wricha wrote:
Tue Sep 17, 2019 5:46 am
The super wealthy can create different corporate structures that allow them certain advantages based on those corporate structures. These structures allow them to account for expenses and place assets strategically. One example that I am confronted with now is IRMMA. Although not technically a tax it operates the same way. Because of investments including muni bond interest after 65 I am required to buy Medicare and pay an addition $6k a year above what most people pay for part B and D. I am not allowed to buy private insurance. Our healthcare insurance under Medicare is now over $20k this year, last year at 64 it was under $10k. Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M. It is near impossible for me to set up a company hire 20 employees and buy health insurance through this structure at this stage of my life.
I’m not there yet, but I’ve wondered what “robust” traditional Medicare (“all-in”, with a good supplement and Part D...NOT Medicare Advantage) will cost a high income person. So you’re saying $800/month per person, give or take, at present?

motorcyclesarecool
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by motorcyclesarecool » Tue Sep 17, 2019 6:03 am

Frankly, there is an awful lot of tax planning tools that can be within reach of a dual income couple. And Bogleheads is a place you can find out about these tools for free. Paraphrasing Keith at the Wealthy Accountant, Uncle Sam loves people who save their income. By putting a good chunk of your income into your back pocket instead of your front pocket, you can reduce your tax burden substantially.

Beyond all the savings vehicles written into the tax code for people making barely six figures or fewer, I think the ultra rich structure their lives so that their income is mostly non-wage income.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

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CAsage
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by CAsage » Tue Sep 17, 2019 12:01 pm

Leesbro63 wrote:
Tue Sep 17, 2019 5:57 am
I’m not there yet, but I’ve wondered what “robust” traditional Medicare (“all-in”, with a good supplement and Part D...NOT Medicare Advantage) will cost a high income person. So you’re saying $800/month per person, give or take, at present?
Looking at the chart below, I read the the maximum for Part B is $460 per person? You could then add in Part D (drugs) or Part C (advantage). I read the chart as the higher income consumer is now picking up 80% of the actual cost, and Medicare is not a for-profit enterprise. YMMV.

https://www.medicarefaq.com/faqs/medica ... -for-2019/
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Admiral
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Admiral » Tue Sep 17, 2019 12:06 pm

motorcyclesarecool wrote:
Tue Sep 17, 2019 6:03 am
Frankly, there is an awful lot of tax planning tools that can be within reach of a dual income couple. And Bogleheads is a place you can find out about these tools for free. Paraphrasing Keith at the Wealthy Accountant, Uncle Sam loves people who save their income. By putting a good chunk of your income into your back pocket instead of your front pocket, you can reduce your tax burden substantially.

Beyond all the savings vehicles written into the tax code for people making barely six figures or fewer, I think the ultra rich structure their lives so that their income is mostly non-wage income.
This. If you're living on dividends or capital gains, you're way better off (tax wise) than even a highly paid Joe/Jane Schmo who receives those pesky wages.

And let's not forget that many of these tax reduction/avoidance schemes are of dubious legality (see: Panama Papers).

Alaric
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Alaric » Tue Sep 17, 2019 12:26 pm

A big tax avoidance mechanism utilized by the ultra-rich is available to the rest of us, but most of us have no need of it — avoiding (federal) estate and inheritance taxes by structuring inheritances as family trusts or life insurance benefits. Unless your net worth is > $11 million it's not an avoidance strategy you would even have to consider.

Related is a strategy that can be and often is used by the middle class and upper middle class, minimizing or avoiding state-level estate taxes. And the simplest way to do that, as a resident of state with a lower exemption threshold for estate taxes (MA, NY, etc.) is simply to move to one of the many states with no estate on inheritance tax, or to one with a high exemption amount. And to avoid inheritance taxes, the potential heirs themselves would ideally avoid being residents of one of the half dozen state which impose an inheritance tax (as opposed to, or in addition to an estate tax) on their residents.

NotWhoYouThink
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by NotWhoYouThink » Tue Sep 17, 2019 2:05 pm

Wricha wrote:
Tue Sep 17, 2019 5:46 am
The super wealthy can create different corporate structures that allow them certain advantages based on those corporate structures. These structures allow them to account for expenses and place assets strategically. One example that I am confronted with now is IRMMA. Although not technically a tax it operates the same way. Because of investments including muni bond interest after 65 I am required to buy Medicare and pay an addition $6k a year above what most people pay for part B and D. I am not allowed to buy private insurance. Our healthcare insurance under Medicare is now over $20k this year, last year at 64 it was under $10k. Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M. It is near impossible for me to set up a company hire 20 employees and buy health insurance through this structure at this stage of my life.
If IRMAA is a budget concern for you, then you don't fall into the category described in the OP
I realize this is a vague request but there is always a lot of discussion in the media and punditry about how the super wealthy can hire teams of lawyers to accumulate more money via avoiding taxes and shielding assets etc. but I never see any in-depth discussions about what it is exactly they’re doing that is so out of the question for, say, your average two-income professional family.

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unclescrooge
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by unclescrooge » Tue Sep 17, 2019 2:44 pm

One way to use the tax code to avoid taxes is via a section 831 (b) captive election.

I'm not sure on the details, but it seems if you have a company with substantial income, you can essentially fund your own insurance company and self-insure against certain losses. Any excess premiums can be invested, berkshire hathaway-style, and profits can be paid out as dividends.

It sounds sort of scammy to me, but it's definitely being pushed by large wirehouse advisors to wealthy business owners and also physicians.

miamivice
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by miamivice » Tue Sep 17, 2019 2:46 pm

Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.

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FIREchief
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by FIREchief » Tue Sep 17, 2019 7:06 pm

miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

kaneohe
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by kaneohe » Tue Sep 17, 2019 7:17 pm

CAsage wrote:
Tue Sep 17, 2019 12:01 pm
Leesbro63 wrote:
Tue Sep 17, 2019 5:57 am
I’m not there yet, but I’ve wondered what “robust” traditional Medicare (“all-in”, with a good supplement and Part D...NOT Medicare Advantage) will cost a high income person. So you’re saying $800/month per person, give or take, at present?
Looking at the chart below, I read the the maximum for Part B is $460 per person? You could then add in Part D (drugs) or Part C (advantage). I read the chart as the higher income consumer is now picking up 80% of the actual cost, and Medicare is not a for-profit enterprise. YMMV.

https://www.medicarefaq.com/faqs/medica ... -for-2019/
don't forget the ptB Medigap in addition to Pt B Medicare and pt D Rx drugs........perhaps another $150-250/mo plus pt D IRMAA (up to $75/mo)
Last edited by kaneohe on Tue Sep 17, 2019 9:29 pm, edited 1 time in total.

BillWalters
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by BillWalters » Tue Sep 17, 2019 7:23 pm

With minority discounting, private business owners can gift shares worth $50 million or more with their supposed $22 million exemption. Put it in a generation skipping trust and it can grow tax free for a very long time.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Stinky » Tue Sep 17, 2019 7:45 pm

Leesbro63 wrote:
Tue Sep 17, 2019 5:57 am

I’m not there yet, but I’ve wondered what “robust” traditional Medicare (“all-in”, with a good supplement and Part D...NOT Medicare Advantage) will cost a high income person. So you’re saying $800/month per person, give or take, at present?
You’ve got it pegged.

Times two for a husband and wife.
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miamivice
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by miamivice » Tue Sep 17, 2019 8:16 pm

FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...

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Steelersfan
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Steelersfan » Tue Sep 17, 2019 8:30 pm

Alaric wrote:
Tue Sep 17, 2019 12:26 pm
And to avoid inheritance taxes, the potential heirs themselves would ideally avoid being residents of one of the half dozen state which impose an inheritance tax (as opposed to, or in addition to an estate tax) on their residents.
At least for my state (one of the half dozen), even if an heir lives out of state they still pay the inheritance tax to my state.

Wricha
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Wricha » Tue Sep 17, 2019 9:49 pm

NotWhoYouThink wrote:
Tue Sep 17, 2019 2:05 pm
Wricha wrote:
Tue Sep 17, 2019 5:46 am
The super wealthy can create different corporate structures that allow them certain advantages based on those corporate structures. These structures allow them to account for expenses and place assets strategically. One example that I am confronted with now is IRMMA. Although not technically a tax it operates the same way. Because of investments including muni bond interest after 65 I am required to buy Medicare and pay an addition $6k a year above what most people pay for part B and D. I am not allowed to buy private insurance. Our healthcare insurance under Medicare is now over $20k this year, last year at 64 it was under $10k. Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M. It is near impossible for me to set up a company hire 20 employees and buy health insurance through this structure at this stage of my life.
If IRMAA is a budget concern for you, then you don't fall into the category described in the OP
I realize this is a vague request but there is always a lot of discussion in the media and punditry about how the super wealthy can hire teams of lawyers to accumulate more money via avoiding taxes and shielding assets etc. but I never see any in-depth discussions about what it is exactly they’re doing that is so out of the question for, say, your average two-income professional family.
Did I say it was a budget concern? I believe the example was used as a way of showing the super wealthy can use corporate structures to avoid paying the government money that other people are required to pay.

Wricha
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Wricha » Tue Sep 17, 2019 9:51 pm

Leesbro63 wrote:
Tue Sep 17, 2019 5:57 am
Wricha wrote:
Tue Sep 17, 2019 5:46 am
The super wealthy can create different corporate structures that allow them certain advantages based on those corporate structures. These structures allow them to account for expenses and place assets strategically. One example that I am confronted with now is IRMMA. Although not technically a tax it operates the same way. Because of investments including muni bond interest after 65 I am required to buy Medicare and pay an addition $6k a year above what most people pay for part B and D. I am not allowed to buy private insurance. Our healthcare insurance under Medicare is now over $20k this year, last year at 64 it was under $10k. Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M. It is near impossible for me to set up a company hire 20 employees and buy health insurance through this structure at this stage of my life.
I’m not there yet, but I’ve wondered what “robust” traditional Medicare (“all-in”, with a good supplement and Part D...NOT Medicare Advantage) will cost a high income person. So you’re saying $800/month per person, give or take, at present?
[/quote

All in is a little difficult to define as there are so many options and associated cost. This should get you started on additional cost for part b and part d

Modified Adjusted Gross Income (MAGI)
Part B monthly premium amount
Prescription drug coverage monthly premium amount
Individuals with a MAGI of $85,000 or less
2019 standard premium= $135.50
Your plan premium
Individuals with a MAGI above $85,000 up to $415,000
Standard premium + $297.90
Your plan premium + $70.90
Individuals with a MAGI equal to or above $415,000
Standard premium + $325.00
Your plan premium + $77.40

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FIREchief
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by FIREchief » Tue Sep 17, 2019 10:36 pm

miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
Isn't this like telling somebody who asks you "what time is it?" how to go about building big ben? :P
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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CAsage
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by CAsage » Wed Sep 18, 2019 8:33 am

kaneohe wrote:
Tue Sep 17, 2019 7:17 pm
CAsage wrote:
Tue Sep 17, 2019 12:01 pm
Looking at the chart below, I read the the maximum for Part B is $460 per person? You could then add in Part D (drugs) or Part C (advantage). I read the chart as the higher income consumer is now picking up 80% of the actual cost, and Medicare is not a for-profit enterprise. YMMV.

https://www.medicarefaq.com/faqs/medica ... -for-2019/
don't forget the ptB Medigap in addition to Pt B Medicare and pt D Rx drugs........perhaps another $150-250/mo plus pt D IRMAA (up to $75/mo)
I will need to look out for those! Not there yet, so I've only done mental research on pricing. Still way cheaper than what most people pay for private insurance if you aren't lucky enough to get it through your employer. Do you know where I can get a total price (coming up soon...).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

ras4250
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by ras4250 » Wed Sep 18, 2019 8:39 am

FIREchief wrote:
Tue Sep 17, 2019 10:36 pm
Isn't this like telling somebody who asks you "what time is it?" how to go about building big ben? :P
No, because Big Ben is a bell :P

Leesbro63
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Leesbro63 » Wed Sep 18, 2019 10:35 am

ras4250 wrote:
Wed Sep 18, 2019 8:39 am
FIREchief wrote:
Tue Sep 17, 2019 10:36 pm
Isn't this like telling somebody who asks you "what time is it?" how to go about building big ben? :P
No, because Big Ben is a bell :P
No, in Pittsburgh he is a (now injured :( quarterback)

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by bsteiner » Wed Sep 18, 2019 10:41 am

For income tax, probably the largest benefit for the wealthy is the basis step-up at death.

For estate tax, the wealthy can make gifts to trusts that are grantor trusts for income tax purposes (or trusts that pay their own tax but are set up so as not to pay state income tax). They can lend money to or sell assets to the trust. They can create grantor retained annuity trusts (GRATs).

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by unclescrooge » Wed Sep 18, 2019 10:52 am

miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
All 1 million lines of it, it any sections in particular?

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FIREchief
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by FIREchief » Wed Sep 18, 2019 1:54 pm

unclescrooge wrote:
Wed Sep 18, 2019 10:52 am
miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
All 1 million lines of it, it any sections in particular?
That poster did PM me that he/she was referring to the option to just leave everything to charity, so the original post was no more serious than the suggestion to read the tax code.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Jack FFR1846 » Wed Sep 18, 2019 2:00 pm

Alaric wrote:
Tue Sep 17, 2019 12:26 pm
A big tax avoidance mechanism utilized by the ultra-rich is available to the rest of us, but most of us have no need of it — avoiding (federal) estate and inheritance taxes by structuring inheritances as family trusts or life insurance benefits. Unless your net worth is > $11 million it's not an avoidance strategy you would even have to consider.

Related is a strategy that can be and often is used by the middle class and upper middle class, minimizing or avoiding state-level estate taxes. And the simplest way to do that, as a resident of state with a lower exemption threshold for estate taxes (MA, NY, etc.) is simply to move to one of the many states with no estate on inheritance tax, or to one with a high exemption amount. And to avoid inheritance taxes, the potential heirs themselves would ideally avoid being residents of one of the half dozen state which impose an inheritance tax (as opposed to, or in addition to an estate tax) on their residents.
I'm not moving from MA to Florida to avoid these taxes. Heck....where do you even ride a snow machine in Florida?
Bogle: Smart Beta is stupid

NotWhoYouThink
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by NotWhoYouThink » Wed Sep 18, 2019 2:18 pm

FIREchief wrote:
Wed Sep 18, 2019 1:54 pm
unclescrooge wrote:
Wed Sep 18, 2019 10:52 am
miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
All 1 million lines of it, it any sections in particular?
That poster did PM me that he/she was referring to the option to just leave everything to charity, so the original post was no more serious than the suggestion to read the tax code.
Thanks, that's the answer I was expecting, not sure why it had to be PM'd.

Avoiding income and estate taxes on 8-9 digit legacies is expensive. It takes teams of lawyers and accountants, all charging by the hour. And most people who pay those teams don't really understand the math and logic well enough to know whether they are getting value for their money. Not that they are stupid, just that they are content to pay experts to do a job and not sweat the details. So those people are not on bogleheads, and their teams of high paid professionals isn't talking, might spoil a good gig.

LFS1234
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by LFS1234 » Wed Sep 18, 2019 2:38 pm

slalom wrote:
Tue Sep 17, 2019 4:21 am
I realize this is a vague request but there is always a lot of discussion in the media and punditry about how the super wealthy can hire teams of lawyers to accumulate more money via avoiding taxes and shielding assets etc. but I never see any in-depth discussions about what it is exactly they’re doing that is so out of the question for, say, your average two-income professional family.

Beyond setting up a trust (typically only a few thousand dollars to set up) what are all these super secret/expensive ways the rich are supposedly getting away with things via ‘teams of lawyers’? What are some of the strategies actually being employed and why can’t a typical boglehead do them?
If OP or OP's acquaintance is such a "super-wealthy" person seeking to "accumulate more money via avoiding taxes and shielding assets etc.", then let's have some details on his or her specific situation so that rational, useful responses might be offered. This post is an example of why "actionability" ought to be, and fortunately is, a requirement on Bogleheads.

Lack of actionability leads to way too much nonsense and diatribes.

The overwhelmingly most important tax rules - relating to lower tax rates on certain types of income, tax sheltered retirement accounts, avoidance of estate taxes through charitable gifting, etc. - are available to everyone with a job and the ability to save. For those "ultra-wealthy" who for whatever reason find them insufficient, I am sure they'll be able to use some of their excess cash to retain "teams of lawyers" who will be happy to present them with seven-figure bills for creating complicated messes which may or may not provide some minor incremental benefits.

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unclescrooge
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by unclescrooge » Wed Sep 18, 2019 3:13 pm

FIREchief wrote:
Wed Sep 18, 2019 1:54 pm
unclescrooge wrote:
Wed Sep 18, 2019 10:52 am
miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
All 1 million lines of it, it any sections in particular?
That poster did PM me that he/she was referring to the option to just leave everything to charity, so the original post was no more serious than the suggestion to read the tax code.
I guess that works too!

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FIREchief
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by FIREchief » Wed Sep 18, 2019 3:18 pm

I'm not sure why folks keep thinking that it takes a "team of high priced lawyers" when we already have the core answer (for free) from our own forum expert. It's fun to put the blinders on and dream up this elaborate, mysterious dark realm where the ultra-wealthy avoid all taxes. I believe that the rich pay the vast majority of the federal taxes in this country, and those who are willing to go to extremes to avoid them at times wind up in jail or on the run in some dark corner of the world (despite hiring the highest priced lawyers).
bsteiner wrote:
Wed Sep 18, 2019 10:41 am
For income tax, probably the largest benefit for the wealthy is the basis step-up at death.

For estate tax, the wealthy can make gifts to trusts that are grantor trusts for income tax purposes (or trusts that pay their own tax but are set up so as not to pay state income tax). They can lend money to or sell assets to the trust. They can create grantor retained annuity trusts (GRATs).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Ob81
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Ob81 » Wed Sep 18, 2019 3:42 pm

The wealthy have multiple income sources with multiple triggers for taxes. To limit their exports taxes, they utilize different tools. The tools are available to everyone, but typically don’t make much sense due to a lack of an abundance of moving parts.

So, how the typical person utilizes a 401k, IRA, and an interest deduction. A wealthy person will utilize these tools above, as well as depreciation, artifacts, etc. the methods are discussed, but only after reaching a certain point when you exceed the basic tools.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by JackoC » Wed Sep 18, 2019 4:06 pm

FIREchief wrote:
Wed Sep 18, 2019 3:18 pm
I'm not sure why folks keep thinking that it takes a "team of high priced lawyers" when we already have the core answer (for free) from our own forum expert. It's fun to put the blinders on and dream up this elaborate, mysterious dark realm where the ultra-wealthy avoid all taxes. I believe that the rich pay the vast majority of the federal taxes in this country, and those who are willing to go to extremes to avoid them at times wind up in jail or on the run in some dark corner of the world (despite hiring the highest priced lawyers).
bsteiner wrote:
Wed Sep 18, 2019 10:41 am
For income tax, probably the largest benefit for the wealthy is the basis step-up at death.

For estate tax, the wealthy can make gifts to trusts that are grantor trusts for income tax purposes (or trusts that pay their own tax but are set up so as not to pay state income tax). They can lend money to or sell assets to the trust. They can create grantor retained annuity trusts (GRATs).
I agree, the concept of 'ultra wealthy avoiding most taxes with teams of high priced lawyers' has a large degree of populist mythos to it. And as another poster mentioned, it's hard to discuss it in vague terms without the responses turning into vague rants.

It's kind of silly IMO for example to give hand waving references to supposed ways to entirely avoid the estate tax for the 'super wealthy' posted by people who probably also entirely avoid the estate tax...because their estates will be well below the exemption. :happy

There's some truth to the idea of a relative scale advantage for people very far above the estate tax exemption as compared to people just far above it. But again that is mainly inherent to the amount of money. For example if you have billions, you can achieve lasting *influence* for your family even if you put the money in a charitable trust (which has to give out IIRC 5%+ per year to charity to quality). There's no trick structure that gets that money into the hands of heirs for lavish consumption, but the heirs can have societal influence if they govern the foundation, or if they can't do any better by themselves might even be hired (though for relatively moderate salaries) as officers of the foundation. So how can you do that if you don't have billions? Obviously, you can't, because you're not going to gain major league influence as heir governing even a $10mil foundation, you're not going do much to form opinions society-wide with that size foundation. At the helm of a $5bil or $50bil foundation, you might. But that's not exactly a secret formula.

In terms of giving heirs large amounts to use for *their consumption*, you actually can't get around the estate tax if you have many times more than the exemption. The common structures which work to get money out of your estate work basically only up to the exemption, or some factor more if you set up a structure which allows a discounting of the gift amount (somebody suggested a 50% discount, but that's very aggressive, considerably less discount is more usual, maybe 20-25%). And you also then, obviously, lose the part of the exemption you used to set up the trust structure when the grim reaper finally comes for you. The advantage is really only a second order one, that the value of the assets you moved out of the estate by using up exemption grew faster in market value than the exemption grew. Or if the exemption is reduced in the future (which it will be under current tax law, the current ~11/22mil exemption expires). Plus the benefit of that discount. But it's not a free lunch. And again even 'teams of smart lawyers' can't make the estate tax go away for amounts far above the exemption. The best bet there is again to keep some advantage of that money for heirs, for example influence via control of a charitable foundation, as opposed to them actually being able to spend it tax free on Bentley's, yachts, or name your stereotype of 'idle rich' spending.

The capital gains basis step up, like many other features of the US tax code, benefits people who are at least well off, not just extremely rich people. And it's as complicated as falling off a log.

Worrying about IRMAA additions to Medicare premiums seems pretty trivial if your net worth is anywhere near the current estate tax exemption.

Gill
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Gill » Wed Sep 18, 2019 4:35 pm

FIREchief wrote:
Wed Sep 18, 2019 1:54 pm
unclescrooge wrote:
Wed Sep 18, 2019 10:52 am
miamivice wrote:
Tue Sep 17, 2019 8:16 pm
FIREchief wrote:
Tue Sep 17, 2019 7:06 pm
miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
Link?
Just read the tax code...
All 1 million lines of it, it any sections in particular?
That poster did PM me that he/she was referring to the option to just leave everything to charity, so the original post was no more serious than the suggestion to read the tax code.
Now that was a bit of a cop out, wasn't it?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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UpsetRaptor
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by UpsetRaptor » Wed Sep 18, 2019 4:58 pm

Wricha wrote:
Tue Sep 17, 2019 5:46 am
Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M.
The bolded is untrue, right? I thought the max that IRMAA can increase one's tab is a few hundred a month.

I like the thread OP. I've always heard the wealthy-avoiding-taxes-with-lawyers schtick and thought "What am I missing"? Sounds like not much.

ivk5
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by ivk5 » Wed Sep 18, 2019 5:31 pm

bsteiner wrote:
Wed Sep 18, 2019 10:41 am
For income tax, probably the largest benefit for the wealthy is the basis step-up at death.

For estate tax, the wealthy can make gifts to trusts that are grantor trusts for income tax purposes (or trusts that pay their own tax but are set up so as not to pay state income tax). They can lend money to or sell assets to the trust. They can create grantor retained annuity trusts (GRATs).
Would borrowing against taxable securities portfolio (coupled with basis step-up at death) make this list?

I don’t know how common that is as a CG deferral/avoidance strategy. But maybe needing to generate spendable cash from portfolio in excess of natural dividend distribution is not a problem that plagues the wealthy.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by gougou » Wed Sep 18, 2019 5:59 pm

I'm trying to follow the story on Jeffrey Epstein's $500M+ estate and why it seems like he won't pay any federal estate taxes. I think it might have something to do with a trust on US Virgin Islands.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by bsteiner » Wed Sep 18, 2019 6:27 pm

gougou wrote:
Wed Sep 18, 2019 5:59 pm
I'm trying to follow the story on Jeffrey Epstein's $500M+ estate and why it seems like he won't pay any federal estate taxes. I think it might have something to do with a trust on US Virgin Islands.
The Virgin Islands has its own income tax, but his estate is subject to U.S. estate tax like that of any other U.S. citizen or resident.

However, many individuals have filed claims have been filed against his estate. The amounts that will be paid to the claimants will be deductible in the same way as any other debts.

He left his estate to the trustees of a living trust, so we don't know how it will go. But if anything remaining after the claims goes to charity (which is possible since he didn't leave a spouse or children, and his brother is successful), that will be deductible as well.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by bhsince87 » Wed Sep 18, 2019 6:30 pm

gougou wrote:
Wed Sep 18, 2019 5:59 pm
I'm trying to follow the story on Jeffrey Epstein's $500M+ estate and why it seems like he won't pay any federal estate taxes. I think it might have something to do with a trust on US Virgin Islands.
Supposedly, he actually made his fortune by being a tax-avoidance expert for the super wealthy.

Maybe his methods will never be known.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

malabargold
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by malabargold » Wed Sep 18, 2019 6:37 pm

Pass as much on to younger generations as soon as possible

WhiteMaxima
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by WhiteMaxima » Wed Sep 18, 2019 6:48 pm

Establish your family own private foundation.

Zombies
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Zombies » Wed Sep 18, 2019 7:16 pm

I believe the biggest way to transfer wealth (and one I intend to try) has been mentioned above — putting shares of newly formed companies into trust without voting rights when a company is first formed. So you give a child some x% of a company, but assign all voting through proxy to you, so the shares have value but no control. When companies are formed the valuation is negligible, so you can “gift” say, $15,000 worth of shares outside the estate tax exemption — and then if the company does well, this may be hundreds of millions of dollars outside your estate. The trust will still owe capital gains, of course, so some tax is paid, but it can be grown without having to pay estate tax. I believe this is extremely common among entrepreneurs with wealth. If the company goes out of business, no harm, no foul.

This is also a way some people get tons of money into retirement accounts — although this is more complicated because of self dealing rules, but I believe with some self directed IRAs there are ways to have that invested into a new company (at the tiny initial valuations), which if it grows, grows tax-optimally. I know less about this though.

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by RudyS » Wed Sep 18, 2019 9:39 pm

miamivice wrote:
Tue Sep 17, 2019 2:46 pm
Nobody has to pay estate taxes. The methods of avoiding paying estate taxes are available to all and clearly shown on the IRS website.
You probably mean FEDERAL estate taxes. Massachusetts is not that nice!

BillWalters
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by BillWalters » Wed Sep 18, 2019 10:01 pm

Mitt Romney has a $100 million Roth.

Carried interest is an absolute joke.

Wricha
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Wricha » Wed Sep 18, 2019 10:47 pm

UpsetRaptor wrote:
Wed Sep 18, 2019 4:58 pm
Wricha wrote:
Tue Sep 17, 2019 5:46 am
Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M.
The bolded is untrue, right? I thought the max that IRMAA can increase one's tab is a few hundred a month.

I like the thread OP. I've always heard the wealthy-avoiding-taxes-with-lawyers schtick and thought "What am I missing"? Sounds like not much.
I don’t believe so. I stand by my number it’s on the Medicare web site and on my bill. Between part B and part d the impact of IRMAA is around $500/month. Warren’s net worth is at least 3000x my net worth so $6000 x 3000 = $18M. Which part is un true?

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Re: Tax avoidance and estate planning ‘for the rich’?

Post by bhsince87 » Wed Sep 18, 2019 10:57 pm

BillWalters wrote:
Wed Sep 18, 2019 10:01 pm
Mitt Romney has a $100 million Roth.

Carried interest is an absolute joke.
Not true. It's been discussed here before.

He or his heirs will be paying significant taxes on it when withdrawals are made. It was actually a questionable financial decision on his part.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

ivk5
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by ivk5 » Wed Sep 18, 2019 10:59 pm

Wricha wrote:
Wed Sep 18, 2019 10:47 pm
UpsetRaptor wrote:
Wed Sep 18, 2019 4:58 pm
Wricha wrote:
Tue Sep 17, 2019 5:46 am
Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M.
The bolded is untrue, right? I thought the max that IRMAA can increase one's tab is a few hundred a month.

I like the thread OP. I've always heard the wealthy-avoiding-taxes-with-lawyers schtick and thought "What am I missing"? Sounds like not much.
I don’t believe so. I stand by my number it’s on the Medicare web site and on my bill. Between part B and part d the impact of IRMAA is around $500/month. Warren’s net worth is at least 3000x my net worth so $6000 x 3000 = $18M. Which part is un true?
The payment does not scale linearly as a percentage of net worth (in fact it has nothing to do with net worth, it’s an income-based calculation).

The max surcharge over standard premium is $325/m for Part B and $77/m for prescription drug coverage for MAGI > $750k (MFJ). https://www.ssa.gov/pubs/EN-05-10536.pdf

shess
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by shess » Wed Sep 18, 2019 11:50 pm

ivk5 wrote:
Wed Sep 18, 2019 5:31 pm
Would borrowing against taxable securities portfolio (coupled with basis step-up at death) make this list?

I don’t know how common that is as a CG deferral/avoidance strategy. But maybe needing to generate spendable cash from portfolio in excess of natural dividend distribution is not a problem that plagues the wealthy.
I looked into this, and what I found was that borrowing against stocks had lower rates than things like personal loans, but generally wasn't competitive with secured loans like mortgages. For a normal-person kind of house, there didn't seem to be any value to it.

Of course, if you are buying something where the mortgage payments would not be supported by your income, you'll either be paying a higher rate or not be able to get the loan at all. In that case, taking a loan against securities might make more sense than selling those same securities, assuming you have some means to pay it down. But I'd guess most not-super-wealthy people aren't purchasing $25M properties, so that won't scale down to people with more normal financial means.

bltn
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by bltn » Thu Sep 19, 2019 5:17 am

JackoC wrote:
Wed Sep 18, 2019 4:06 pm
FIREchief wrote:
Wed Sep 18, 2019 3:18 pm
I'm not sure why folks keep thinking that it takes a "team of high priced lawyers" when we already have the core answer (for free) from our own forum expert. It's fun to put the blinders on and dream up this elaborate, mysterious dark realm where the ultra-wealthy avoid all taxes. I believe that the rich pay the vast majority of the federal taxes in this country, and those who are willing to go to extremes to avoid them at times wind up in jail or on the run in some dark corner of the world (despite hiring the highest priced lawyers).
bsteiner wrote:
Wed Sep 18, 2019 10:41 am
For income tax, probably the largest benefit for the wealthy is the basis step-up at death.

For estate tax, the wealthy can make gifts to trusts that are grantor trusts for income tax purposes (or trusts that pay their own tax but are set up so as not to pay state income tax). They can lend money to or sell assets to the trust. They can create grantor retained annuity trusts (GRATs).
I agree, the concept of 'ultra wealthy avoiding most taxes with teams of high priced lawyers' has a large degree of populist mythos to it. And as another poster mentioned, it's hard to discuss it in vague terms without the responses turning into vague rants.

It's kind of silly IMO for example to give hand waving references to supposed ways to entirely avoid the estate tax for the 'super wealthy' posted by people who probably also entirely avoid the estate tax...because their estates will be well below the exemption. :happy

There's some truth to the idea of a relative scale advantage for people very far above the estate tax exemption as compared to people just far above it. But again that is mainly inherent to the amount of money. For example if you have billions, you can achieve lasting *influence* for your family even if you put the money in a charitable trust (which has to give out IIRC 5%+ per year to charity to quality). There's no trick structure that gets that money into the hands of heirs for lavish consumption, but the heirs can have societal influence if they govern the foundation, or if they can't do any better by themselves might even be hired (though for relatively moderate salaries) as officers of the foundation. So how can you do that if you don't have billions? Obviously, you can't, because you're not going to gain major league influence as heir governing even a $10mil foundation, you're not going do much to form opinions society-wide with that size foundation. At the helm of a $5bil or $50bil foundation, you might. But that's not exactly a secret formula.

In terms of giving heirs large amounts to use for *their consumption*, you actually can't get around the estate tax if you have many times more than the exemption. The common structures which work to get money out of your estate work basically only up to the exemption, or some factor more if you set up a structure which allows a discounting of the gift amount (somebody suggested a 50% discount, but that's very aggressive, considerably less discount is more usual, maybe 20-25%). And you also then, obviously, lose the part of the exemption you used to set up the trust structure when the grim reaper finally comes for you. The advantage is really only a second order one, that the value of the assets you moved out of the estate by using up exemption grew faster in market value than the exemption grew. Or if the exemption is reduced in the future (which it will be under current tax law, the current ~11/22mil exemption expires). Plus the benefit of that discount. But it's not a free lunch. And again even 'teams of smart lawyers' can't make the estate tax go away for amounts far above the exemption. The best bet there is again to keep some advantage of that money for heirs, for example influence via control of a charitable foundation, as opposed to them actually being able to spend it tax free on Bentley's, yachts, or name your stereotype of 'idle rich' spending.

The capital gains basis step up, like many other features of the US tax code, benefits people who are at least well off, not just extremely rich people. And it's as complicated as falling off a log.

Worrying about IRMAA additions to Medicare premiums seems pretty trivial if your net worth is anywhere near the current estate tax exemption.
Excellent discussion. I also believe that the concept of the very rich avoiding taxes is significantly popular mythology.

Maintaining estate increases in the form of unrealized capital gains to take advantage of the step up in basis on the transfer of these assets is a simple formula many of us can use.

Wricha
Posts: 508
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Re: Tax avoidance and estate planning ‘for the rich’?

Post by Wricha » Thu Sep 19, 2019 5:41 am

ivk5 wrote:
Wed Sep 18, 2019 10:59 pm
Wricha wrote:
Wed Sep 18, 2019 10:47 pm
UpsetRaptor wrote:
Wed Sep 18, 2019 4:58 pm
Wricha wrote:
Tue Sep 17, 2019 5:46 am
Warren Buffett no doubt buys his health insurance though one of his companies. By the way, based on Warren’s net worth proportional to my net worth his additional IRMAA payment would be in excess of $18M.
The bolded is untrue, right? I thought the max that IRMAA can increase one's tab is a few hundred a month.

I like the thread OP. I've always heard the wealthy-avoiding-taxes-with-lawyers schtick and thought "What am I missing"? Sounds like not much.
I don’t believe so. I stand by my number it’s on the Medicare web site and on my bill. Between part B and part d the impact of IRMAA is around $500/month. Warren’s net worth is at least 3000x my net worth so $6000 x 3000 = $18M. Which part is un true?
The payment does not scale linearly as a percentage of net worth (in fact it has nothing to do with net worth, it’s an income-based calculation).

The max surcharge over standard premium is $325/m for Part B and $77/m for prescription drug coverage for MAGI > $750k (MFJ). https://www.ssa.gov/pubs/EN-05-10536.pdf
You are right which is just over 400 (had 135 in base for 537). Never said it was based on net worth. Warren did not tell me his income for 2017 but if he is worth 40-50 billion. I am sure he could make 4% on his money or another couple of billion.

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