“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. b 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. b 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. b b b b
Reference
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. ifo 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.
Works Cited
Estate Tax. (n.d.). Retrieved from IRS.gov:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-
tax
