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Ann and Bob’s large estate will be subject to federal estate taxes if the value of gross estate, the
amount of debt owed at the time of your death, the total expenses incurred while settling the estate,
and any deductions that the estate is eligible to take. z For a simple estate such as, cash, publicly traded
securities, small amounts of other easily valued assets, no special deductions of elections, or jointly
held property, the IRS does not require a for 706 for estate tax returns. This form is required for estates
totalling $11,700,000 for 2021, and $12,060,000 for 2022. z Therefore, Ann and Bob would need to fill
out this form.
Ann and Bob do have some options to reduce their taxable estate. z They do have the option to disburse
some of the assets in their estate now rather than waiting until the pass away. By doing this, it would
reduce their taxable estate, however there are limits. They can gift up to $15,000 per person in a
single year. This would be an option if they wanted to give gifts yearly. Ann and Bob could gift
$1,000,000 to each of their children or grandchildren. z Each person would report it on a gift tax return
form 709, the highest tax rate would be 40%.
If the estate is left alone for when Ann and Bob pass away, the assets will be divided evenly and each
person will pay taxes on it. “at a growth rate of 5% per year for 10 years, that $11.7 million gift could
end up being worth over $19.05 million, and your loved ones will have received the entire amount free
from gift or estate taxes. On the other hand, if you held onto those assets and you passed away in 10
years, a large portion of the $19.05 million would be taxed at 40%” (Adams, 2021). Tax rates could
change, and it could negatively affect what is paid by the children. It would be best for the assets to be
divided now versus waiting until they both pass.
When we look at the year 2018 the overall federal exception doubled with Individuals being able to
transfer a total of $11.18 million tax free. Now if we look at 2022 it has gone up to $ 12.06 million for
individuals’ tax free and double that for couples. This amount is set to overall expire in the year 2025.
Therefore, we can determine that Bob and Ann will be able to make a tax-free gift for all their children
and grandchildren overall. With the calculations we have determined that each couple can obtain
$30,000 and all individuals will be able to obtain $15,000. If Bob and Ann can potentially reduce their
estate value all together then they could potentially be able to dodge paying ant estate taxes later as
well. If Bob and Ann decide that they want to decrease their taxable estate by at least $660,000 every
year, then it would be best for them to gift each family member accordingly. Therefore, we can
insinuate that this amount will have no effects within the tax exception amounts.
We can also look at many potential advantages for various gifting strategies related to Bob and Ann.
One of these methods would involve the use of a 529 College Savings Plan which is known to be used
for educational purposes. The money used for the 529 College Savings Plan must be used for qualified
higher-education expenses that can include tuition, books as well as room and board expenses. Also,
these funds can be used for K-12 grade tuition of up to $10,000 a year. Bob and Ann could also even
just consider doing a onetime gift for a total of five years if needed of up to $75,000 tax-free with a
total of $150,000 for each of her children and grandchildren. Bob and Ann finally could even pay
tuition directly for a grandchild that must be in college, above the annual limit without and gift tax
consequences being involved. Therefore, there is no limit for the amount if it is paid directly to the
institution.
Also, if Bob and Ann decide they would like to gift their children and grandchildren with one million
dollars that will effectively total $22 million. If you look above, you can see I mentioned that they are
able to gift $30,000 for each child and grandchild but it is important to note that those are not a part of
the lifetime tax exception. Therefore in 2022, the lifetime tax exception for a couple would total
$24.12 million which would leave Bob and Ann with $2.12 million still gift tax free.
Also, I believe that it will not be beneficial for Bob and Ann for them to not participate within any
estate planning strategies before exceptionally leaving their estate divided up between the children and
grandchildren. This is because tax laws change every year and could have consequences on them in
the future. Therefore, it could be known that their grandchildren and children could get stuck with
paying estate taxes before receiving their inheritance.
The first thing that one always thinks about is the estate and gift tax exemption. Erskine (2022)
explains that, in 2023, there is an annual gift tax exemption of $17,000 per person, as well as a lifetime
exemption of $12.92 million per person. This is the first clear way that Ann and Bob can transfer their
wealth. They can transfer a gift worth $34,000 to each heir this year, and that is use it or lose it, so
there is zero reason that they should not take advantage of it. Furthermore, that is a far cry from the $1
million they are trying to get to their children/grandchildren; however, they are going to get this kind
of inflation-adjusted exemption every year. They can take advantage of it, and if they live for several
more decades, they can offload a lot of that property tax-free. Continuing, they have roughly $26
million worth of lifetime exemption that they can use any time. If they want to give each child and
grandchild a million dollars, this is how they should do it. Once this lifetime exemption runs out, it is
gone. They should use it soon though, considering the exemption is set to go down significantly come
2026. If this wasn’t the case, it may not be as pressing to use up the exemption so quickly. However,
because this is the case, it may be smart to accelerate the transfer process faster and maybe start
dividing up that land. It is up to Ann and Bob, but they need to be aware that using trusts, they can
transfer assets and still largely control the assets. They have significant wealth, and the tax burden is
going to be very large. It is pressing that they are completely aware of the situation, and hear our
recommendation so they can better set their goals. All in all, they can give everyone more than they
wanted to with this option, and it is by far the best.
So where is that going to leave them? Anderson et al. (2023) explains that the gift tax and the estate
tax are one in the same. With that in mind, after they use it now, there won’t be a lot to stop tax
consequences when they die. That means we need to be proactive now to try and transfer more if the
client wants that, since they probably don’t want the ranch broken up in order to pay tax on it. If the
ranch is a business that earns money, the parents can loan adult children money, and then the children
can immediately purchase a chunk of the farm. As their piece of the business earns money, they pay
interest and principle back to the parents, and over time they start to own more and more of the land
with minimal tax consequence. At this point, I’m just suggesting things that go above and beyond
what they were asking for. However, there is no reason they shouldn’t consider accelerating things
since there is such high motivation to find tax breaks. They can always make sure they themselves
have plenty of money to do the things they want to do. Beyond that, they want to give it to who they
want to give it to in the most efficient way possible.
One way Bob and Ann could reduce their estate tax, is by giving gifts. As of 2022, gifts of $16,000
could be given and not be taxed (Anderson et al., 2023). This number has increased by $1000 yearly.
By giving these gifts annually, it could reduce the value of their taxable estate. They could also take
advantage of the gift-splitting election which allows both spouses to give annual gifts of $16,000 (or
however much the tax-free amount is for that year) totalling $32,000, without being taxed. Another
way to reduce their taxable estate is my making charitable contributions. Under section 2055, allows
them to make transfers to charitable organizations, which is then a deduction from their estate tax
liability. Another option is to set up a Family Limited Partnership which is a type of trust set up among
family members with business interest (Suitt, 2023). They can shift their assets to family members,
which reduces the size of the family estate, which reduces the tax liability of the estate.
If Bob and Ann were to give each of their children and grandchildren $1,000,000 gift, this would
reduce their federal estate tax exemption amount (Garbor, 2021). As of 2022, the federal estate tax
exemption amount was $12.06 million. Combined among the both, that amount would double to
$24.12 million. The total amount of lifetime gifts from Bob and Ann would be $22 million. In order to
get the value of a taxable estate, you must subtract the federal estate tax exemption from the gross
estate amount. However, if there are lifetime gifts involved, you must first subtract the amount of
lifetime gifts from the federal estate tax exemption amount, and then subtract that number from the
gross estate. Therefore, by giving the $22 million in gifts, this would reduce their exemption amount,
which in turn increases their taxable estate amount.
If Bob and Ann were leaving a large estate and divide it amongst their children and grandchildren,
then the estate would be highly taxed. That is why it is recommended they make gift transfers,
charitable donations, etc. to help reduce the taxable estate amount. This way the family can still
benefit, without the estate having to make large tax payments.
References:
Anderson, K. et al. (2023). Federal Taxation 2023. Pearson Education.
Garber, J. (2021). How to Calculate Your Estate Tax Liability. The Balance.
https://www.thebalancemoney.com/how-to-calculate-your-estate-tax-liability-3505645
Suitt, C. (2023). Four Ways to Reduce and Avoid Estate Tax. Super Lawyers.
https://www.superlawyers.com/resources/estate-planning-and-probate/four-ways-to-reduce-and-avoid-
estate-tax/
Erskine, M. (2022). Forbes. IRS Announces Estate and Gift Tax Exemption Amounts For 2023.
Retrieved from: https://www.forbes.com/sites/matthewerskine/2022/11/04/irs-announces-estate-and-
gift-tax-exemption-amounts-for-2023/?sh=5532c05c2817
Anderson, K., Hulse, D., and Rupert, T.,. Prentice Hall’s Federal Taxation 2023 Corporations,
Partnerships, Estates & Trusts. 2023.
Cettina, T. (2023, March 3). Estate planning documents - when you need them and why.Wells Fargo
Advisors.https://lifescapes.wellsfargoadvisors.com/estate-planning-stages/CLA Connect).
Six Tax-Efficient Ways to Transfer Wealth to the
NextGeneration.https://www.claconnect.com/resources/articles/2019/six-tax-efficient-ways-to-
transfer-wealth-to-the-next-generationFiduciary Trust. (n.d.).
Strategies for Making Gifts to Children and Grandchildren.Retrieved on2023, March 3
fromhttps://www.fiduciarytrust.com/insights/commentary?commentaryPath=templatedata/gw-
content/commentary/data/en-us/en-us-ftci/trust-
estate/gifting_to_children_and_grandchildren&commentaryType=TRUST%20&%20ESTATE%20PL
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Adams, H. (2021). The estate tax and Lifetime Gifting. Retrieved from
https://www.schwab.com/resource-center/insights/content/the-estate-tax-and-lifetime-gifting
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