Alice in Wonderland World

As I get older I am more often surprised by what I don't know. I've labored under the terrible misconception for many years that when I earn something, save something, buy something or make something that it is then mine to do with as I wish.

Now, I know that to live in society there are costs. What those costs will be is determined by a political process. Different societies implement that process in different ways but usually it involves a determination of acceptable level of fair burden that the citizens will allow to be imposed upon themselves. If the benefits of government are deemed worthy, the tax load is accepted. If the tax load becomes excessive or the benefits of the government are indadequate then the deal is renegotiated.

Accepting that, I concede to paying a portion of the fruits of my labors as a tax. But after I've paid that tax, I then like to believe that what is mine is mine. Fair is fair, isn't it?

So, this morning I'm enjoying the first cup of coffee and reading this item on the economy in the Dallas Morning Fishwrap:

The gift of family loans
For the rich, rock-bottom rates could help their heirs save millions on interest costs, hefty taxes

Estate planner Richard Behrendt helped his client make $5 million loans to each of his children last year, avoiding gift taxes of 45 percent and saving them as much as $837,000 apiece in interest.

Rates for intrafamily loans have declined as much as 53 percent since 2008. “The timing of it was clearly tied to the rock bottom of these rates,” said Behrendt, who works for Robert W. Baird & Co., based in Milwaukee.

The loans may have been the perfect holiday gift to help relatives last year, according to Carol Kroch, head of wealth and financial planning at Wilmington, Del.-based Wilmington Trust. For wealthy taxpayers, they can be used for estate planning purposes, because gains earned will be free of estate and gift taxes.

That’s because low interest rates and depressed asset values mean there’s a greater possibility that investments purchased with an intrafamily loan, such as stock, will appreciate more than the loan’s cost, Kroch said.

The rate for an intrafamily loan made this month for less than three years is 0.57 percent. The rate is 2.45 percent for a loan of three years to nine years and 4.11 percent for a loan of nine years or more, according to the Internal Revenue Service, which sets the rates monthly.

Does that surprise you at least a little bit? I had believed, mistakenly, that if junior came to dear old dad and said, "Pops, I want to buy a car, an education, a business, a home, or whatever..."

Dad could then discuss conditions under which he might front the bread for the deal. It could be as simple as, "If I buy you a new iPhone, you'll repay me by mowing the lawn all next summer once a week." Or it might be as complex as, "I'll loan you the money to buy a house and rather than you dealing with the mortgage company and paying interest at the current rate, you'll repay me at 2% less than the current market. You can pay the balance any time you feel ready or you can simply pay me...let's see, $873.65 per month."

Either way, it is Dad's cash and it has already been taxed.

So, aren't you a bit stunned that the IRS is setting interest rates for what happens in living rooms of families between next-of-kin? And, all along I thought the inheritance tax was the most ludicrous levy ever devised. I can only suppose at this point that there are many more of which I'm unaware.

At least we know it goes to a good cause, like Murtha Municipal Airport or similar.