Please correct me if misunderstand it. On notes book 1 page 338, for estate tax freezer, it says “preferred stock will be in estate and subject to taxes but at a value that is frozen”. Common stock with nominal value gifted to children, so it’s taxed at small amount, does the tax on inital common shares benefit gifting of preferred stocks, I mean they will not be taxed ??
It also mentions common stock increases in value and will be taxed in Trust. so who will pay the tax? estate tax freezer helps avoid tax on future appreciation of common share, doesn’t it?
Without looking into the para you quoted, estate tax freeze, is a capital gains deferred scheme. The owner exchanges assets for preferred stock, there will be no capital gains on the exchange at this time. The company issues new common shares at market value to beneficiaries, so no capital gain exists for the receiving parties at the time of issue. The original owner will not incur future capital gains taxes on the preference shares as these are frozen, however new beneficiaries (or trust) will pay captial gains on eventual sale of the shares…hence a capital gains tax deferral scheme.
Re. “the original owner will not incur future capital gains taxes on the preference shares”.
I assume if the original owner sell his preference shares, it will trigger a capital gains tax (loss credit) if the selling price is higher (lower) than the underlying tax basis of the preference shares?
I see estate tax freeze as a mean to transfer future capital gains of the underlying asset without transfer the underlying assets cost basis.
What happen when the company cancel the preference shares? I can’t imagine IRS see between the fingers and let capital gains disapear?
EDIT: I agree to your conclusion “hence a capital gains tax deferral scheme”. My above questions is made to “get the bigger picture”