Taxes, Estate Planning and Financial Theory: New Insights and Perspectives

26 Pages Posted: 12 Jan 2005

See all articles by Robert M. Dammon

Robert M. Dammon

Carnegie Mellon University

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Date Written: March 15, 2004

Abstract

We examine how financial theory and economic principles offer guidance and predictions about the organization of investments and asset allocation decisions given the structure of taxes in estate - planning situations. We provide insight about many of the conventional approaches to estate planning and suggest how these strategies can be enhanced. For example, we show that the advantage of the reset provision by which the investor's capital gains tax bases are adjusted to the market value at the time of death is greater in the presence of individual rather than joint ownership of assets, provided that at the first death of one of the joint owners the basis is reset to an average of the date of death value and the survivor's original cost. We analyze asset location and distribution policies in the context of trusts that are outside of the taxable estate of its principal beneficiary as well as direct funds owned by the beneficiary, highlighting the interaction between estate taxation and the reset of the capital gains tax basis at death. We compare the optimal decisions for traditional tax-deferred accounts and after-tax ("Roth") IRAs. Finally, we also examine the value and importance of borrowing in various contexts in estate planning.

JEL Classification: H24, H26

Suggested Citation

Dammon, Robert M. and Spatt, Chester S. and Zhang, Harold Huibing, Taxes, Estate Planning and Financial Theory: New Insights and Perspectives (March 15, 2004). AFA 2005 Philadelphia Meetings Paper. Available at SSRN: https://ssrn.com/abstract=647846 or http://dx.doi.org/10.2139/ssrn.647846

Robert M. Dammon (Contact Author)

Carnegie Mellon University ( email )

GSIA
Pittsburgh, PA 15213
United States
412-268-3696 (Phone)

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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