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) totaling
$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 of them, 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 their are
lifetime gifts involved, you must first substract 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 leave 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/
