“The fair market value of these items is used, not necessarily what you paid for them or what their
values were when you acquired them” (Estate Tax) If they were to consider “gifting” the funds after
their death there would be a higher threshold to contend with. c However, they would have to
establish the funds to be transferred after their death. Since there are three sons, four daughters
and fifteen grandchildren that adds up to 23 people.
They could “gift” the funds while they are still alive. Since there are two people, they can give them
each $30,000 a year. c This means that they could lower their tax liability by over $690,000 a year.
This makes a dent worth looking into.
Ann and Bob can consider several alternatives in order to minimize their taxable estate. One
alternative is to donate a part of their asset to a charitable organization as it can help to reduce the
value of their estate. Another option is to establish irrevocable trusts, which will help to transfer
some of the assets out of their estate. They can also consider transferring a section of their estate to
their grandchildren instead of transferring the same to their own children (Di Porto et al., 2021). This
technique is referred to as generation-skipping transfer tax, and it will prevent their children from
getting taxed on the estate value that has been passed on to the grandchildren. Similarly, the
grandparents can decide to give annual exclusion gifts to their children and grandchildren. However,
its value should be within a certain amount so that it can be exempted from taxation.
In case Ann and Bob decide to gift investments worth $ 1,000,000 to their children and
grandchildren, gift tax will be applicable to them. They will have to file for a gift tax return with the
Internal Revenue Service (IRS). According to IRS Section 2501, tax must be computed on the transfer
of property which has been given as a gift during a calendar year by an individual resident or non-
resident (Bloomberg Tax IRC). The value of the stock that has been given as a gift will be the same as
its fair market value that existed during the time of the transfer. However, it is essential to consider
that no gift tax must be paid by taxpayers in case the value of the gift is below a specific threshold
that has been set by the IRS.
In case Ann and Bob decide to leave their large estate that will be fragmented among their children
and grandchildren, the estate tax will be applicable in the situation (Drometer et al., 2018). As of the
year 2021, the federal estate tax that is applicable in the U.S.A. is 40 % for estates that are worth $
11.7 million (Ebeling - Forbes). As the value of the estate that is owned by the elderly couple is $
100,000,000, a major portion of the estate is likely to be subjected to tax which may diminish the
value that will be derived by their children and grandchildren when the large estate is left to all of
them. c c c c
Because Ann and Bob have a large family of 22 children and grandchildren, according to the IRS
Section 2503 and the chart below, they can each start by gifting, a caveat of $16,000 per year,
bringing a total of $32,000 per year. For the definition of a taxable gift, “That is, include only the
decedent’s one-half of split gifts, whether the gifts were made by the decedent or the decedent’s
spouse.” c However, when gifts are given to their large family during their lifetime, it takes away the
hefty estate exemptions, doing this, the tax-free limit on their estate assets will be lower when they
pass away. c Therefore, there is a great way to reduce the value of their estate without reductions in
their estate exemption.
c c c c c c c c c c
Period -Year of Gift
Annual Exclusion Amount Per Donee
1977 through 1981
$3,000
1981 through 2001
$10,000
2002 through 2005
$11,000
2006 through 2008
$12,000
2009 through 2012
$13,000
2013 through 2017
$14,000
2018 through 2021
$15,000
2022
$16,000
There are other ways to reduce their taxable estates, as follows:
It could be by creating a Foundational Estate Plan, as a married couple, it will be very helpful
because it can reduce or even eliminate both federal and state estate taxes assessed against their
state.
A Qualified Personal Residence Trust, which lets them live in their home for a period of ten years,
then it will pass to their children/grandchildren at a reduced value, for estate and gift tax purposes,
after the period ends.
Creating a Charitable Trust will give them a charitable income tax deduction when the trust is
funded, and it will give them an estate a charitable estate tax deduction.
Creating a Family Limited Liability Company which offers estate tax reduction and asset protection.
Leaving a large estate implies paying a high amount in taxes because it imposes taxes on the transfer
of the estate of a deceased person. As of 2022, estates valued at $12,060,000 or less are exempt
from paying (up from $11.7 million in 2021), which is more than three times the 2009 exemption
level of $3.5 million.
References
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
What's New - Estate and Gift Tax | Internal Revenue Service (irs.gov)
Frequently Asked Questions on Gift Taxes | Internal Revenue Service (irs.gov)
How to Reduce or Even Eliminate Your Death Tax Bill (thebalancemoney.com)
Bloomberg Tax IRC. (n.d.). https://irc.bloombergtax.com/public/uscode/doc/irc/section_2501
Di Porto, E., Martino, E. M., & Ohlsson, H. (2021). Avoiding taxes by transfers within the family.
International Tax and Public Finance, 28, 1-23.
Drometer, M., Frank, M., Pérez, M. H., Rhode, C., Schworm, S., & Stitteneder, T. (2018). Wealth and
inheritance taxation: An overview and country comparison. if DICE Report, 16(2), 45-54.
Ebeling, Ashlea. “IRS Announces Higher Estate and Gift Tax Limits for 2021.” Forbes, Forbes
Magazine, 10 Dec. 2021, https://www.forbes.com/sites/ashleaebeling/2020/10/26/irs-announces-
higher-estate-and-gift-tax-limits-for-2021/?sh=1319cb80459e.
Estate Tax. (n.d.). Retrieved from IRS.gov: https://www.irs.gov/businesses/small-businesses-self-
employed/estate-tax
