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I pay close attention to U.S. politics, but I am already getting tired of what seems like the dirtiest presidential campaign we have ever seen. And it will probably get a lot worse between now and Election Day.
The United States is not the only country that will face a potential leadership change. China will soon install a newly elected president, but that was a carefully planned event where a handpicked individual was “elected.”
The current Chinese president, Hu Jintao, will be replaced with Xi Jinping (pronounced She Gin-Ping), who was hand-selected by the current Chinese leadership and will be only the fifth premier since the 1949 founding of the People’s Republic of China.
Either way, big changes are on the horizon, whether on the leadership front or the tax front … or both … and we’ll talk about whether you need to take steps to protect your wealth before year-end.
Democracy, China-style
Officially, China is a multi-party socialist state under the leadership of the Communist Party. However, China will hold a national democratic election with real ballots, real candidates and real results for other political positions.
The election process is based on a series of representative elections from a direct vote of the people performed by local election committees.
Citizens who are 18 and older vote for village and local congresses. In turn, those congresses elect the representatives to elect roughly 3,000 delegates to the National People’s Congress.
The National People’s Congress is empowered to elect China’s president, premier, vice president and chair of the Central Military Commission as well as the president of the Supreme People’s Court.
In reality, the National People’s Congress merely confirms the successor chosen by the party leadership.
But no matter who is in charge, and how they get there, they have a big job ahead of them in …
Managing, Taxing China’s Next Growth Phase
One major change expected to come from the new Chinese leadership is an inheritance tax.
In 1985, China adopted a law on succession of property, and in 2001, it adopted a law of trusts.
China now has a sophisticated system of income and business tax, but it doesn’t have an estate or inheritance tax. However, the consensus is that it is coming, for three reasons:
First, it is only recently that the Chinese have been allowed to own property. Chinese men are expected to own real estate before getting married, and so having property in the family will be important to the future generations who will eventually inherit it.
Second, China’s booming economy has created a mountain of wealth. It is estimated that there are more than 1 million Chinese millionaires, but I think that number is way too low.
Lastly, China has some very ambitious growth plans, and it needs tax revenues to pay for those ambitions. As U.S. politicians have learned, taxing dead people is easier than taxing living people.
A Taxing Situation in the U.S.
The Chinese Can Learn From
Speaking of the U.S. inheritance tax, unless there is a drastic change of direction on Capitol Hill within the next few months, a new tax will seriously affect our ability to pass our wealth along to our heirs.
Right now, for the first time in history, all Americans have the right to transfer up to $5.1 million to their grandchildren without any transfer tax … no estate, no gift and no generation-skipping tax.
But that inheritance-tax exemption is going to disappear on January 1, 2013.
In late 2010, President Barack Obama signed into law a formal concession to the Republicans extending the Bush tax cuts that were set to expire January 1, 2011. The law was officially known as the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” but has since been shortened to simply the “Tax Relief Act of 2010” (TRA-2010).
Because federal estate taxes were repealed in 2010 because of prior legislation, Congress addressed estate- and gift-tax exemptions, and the top tax brackets, before adjourning.
The 111th Congress made an unexpected and unprecedented movebefore the last minutes of its session expired. As part of TRA-2010, they voted to temporarily increase the federal estate-tax exemption to $5 million, with the top bracket reaching 35% for only 2011 and 2012.
In addition, they increased the gift-tax exclusion to $5 million and eliminated the onerous generation-skip tax (an extra tax penalty for skipping your children and passing assets to your grandchildren) until the gift exceeded the new $5 million lifetime limit.
A Wrinkle that Wealthier Grandparents Can Love
The most remarkable provision of TRA-2010, however, was the little-publicized wrinkle that allows for current gifts to grandchildren to be given, while you are alive, gift- and generation-skip-tax-free up to the $5 million mark.
This inadvertent move means that a grandparent can transfer up to $5 million to his or her grandchildren while still living … bypassing his or her children … all without any gift-tax consequence.
Plus, a husband and wife can transfer up to $10 million, TAX-FREE. This is huge. No, actually this is gigantic!
When Congress wakes up and realizes what it has done, the allowance will be set back to the $1 million level.
You may not have a net worth of $5.1 million. But if your estate is valued in excess of $1 million and you want assets to skip a generation and be given directly to your grandchildren, you must take advantage of this opportunity now before the door closes on January 1.
My personal go-to estate planner gave me some guidance that you might be able to benefit from:
“My recommendation is simply this: If you’ve got it and you want to transfer it while retaining control and continuing to receive the income, transfer it now. Don’t wait until the last minute, and don’t let this opportunity pass you by.”
Unlike China, the U.S. does have an inheritance tax so anybody with a net worth over $1 million needs to take a serious look at their situation … and take action before the end of this year if appropriate.
Best wishes,
Tony
P.S. My friend and colleague Larry Edelson recently asked me for my top Asia pick right now. You can find all the details — including how to take action right now — in the latest issue of his Real Wealth Report.
Plus, Larry shows you how and why to play looming price swings for big profits in one of the world’s most important (and volatile) commodities. Don’t wait — start your membership today by clicking here now!
