1 / 6100%
If Ann and Bob decide to gift each member of their family $1,000,000, they would be subject to a gift
tax. IRC §2501(a)(5)(C) explains that the U.S. asset value of the stock will be the same as the fair
market value at the time of transfer. IRC §2503(b)(2) describes the inflation amount of how much of
the gift will be taxed. Also, if a gift exceeds $17,000 in 2023 and Ann and Bob’s lifetime gift allowing
is $12.92 million. If Ann and Bob give each member of their family $1,000,000, they will be taxed for
any amount of $17,000 per person, as well as being taxed for the difference of $22 million and $12.92
million. (Villanova, 2023). z
Ann and Bob are in an interesting situation, with many opportunities. While being very wealthy, they
have enough family to all avoid avoidable estate taxes. Bob and Ann each have a lifetime gift limit of
$12M in 2023 for a total of $24 million. Leaving approximately $100M to be distributed upon their
passing. Each family member receiving approximately $4.5M and owing $1.7M in estate taxes.
Maxing out the lifetime gift will save the family nearly $10M in estate taxes.
z z z z If Bob and Ann were to gift each of their 22 kids and grandkids $1M in investments it would result
in a number of tax consequences. The $22M gifted to the kids/grandkids would be under the current
lifetime gift limit, in 2023 it would be $24M combined for the two of them, assuming Bob and Ann
had not previously gifted the family. Avoiding gift tax. Any amounts taxed on the recipients personal
returns would be taxed at lower rates than the historic estate tax rates.
z If Bob and Ann were to leave everything, their property and investments, divided equally amongst
to the family it would get taxed aggressively. Each family member would receive assets with an
approximate value of $3.5M. That $3.5M would be taxed $345,800.00 on the first million, then 40%
on everything over the first million. Each family member would owe estate taxes to the tune of $1.3M.
Another option might be, if you are not going to transfer wealth before their passing, would be to put
the investments into a family trust and leaving the property to the family to split evenly.
Bob and Ann could each start by gifting their 22 children and grandchildren $16,000 per year, for a
total of $32,000 per year, per person. Section 2513 states that each spouse may elect gift splitting,
which treats gifts to third parties as if one-half of the gift was made by each spouse (Anderson et al.,
2023). The $32,000 falls under the annual taxable gift threshold for the donee. Another option would
be making charitable contributions.
Leaving the entire estate to their children and grandchildren in their will would mean the entire
amount of the estate is taxed. Some of the cash from their investments could have been gifted tax free
to their family members if they had started before their death.
Gift taxes is something not many people think about when they gift a loved one or someone a gift. In
this case Ann and Bob have a lot to think about when it comes to gifting their children and
grandchildren. The main questions that arises is "would we need to pay taxes on gifting our loved
ones?" "How should we go about gifting them?" What is the best more beneficial way to gift the ones
we love?" These are all questions that are possibly going through Ana and Bob's heads at the moment.
There are gift tax rates at which the amount of the gift is taxed. Right now "the gift tax rates range
from 18% to 40%, and the giver generally pays the tax" (Parys & Orem 2023 p 3). In the event that
Ana and Bob wish to gift their children and grandchild they would have to pay taxes on each gift
given.
There are also some alternatives that they can review in order to reduce the taxable estate. According
to Amanda Dixon in the article, 5 Ways the Rich Can Avoid the Estate Tax, the 5 ways Ana and Bob
can avoid the estate taxes are:
Give gifts to family
Set up an irrevocable life insurance trust
Make charitable donations
Establish a family limited partnership
Fund a qualified personal residence trust
These are all ways they could potentially gift their loved ones and avoid the taxable estate taxes. Just
gifting the family does also come with some restrictions and the value they are allowed prior to paying
the gift taxes. "For 2023, you can give any one person up to $17,000 tax-free (or up to $34,000 if
you’re married and you’re filing joint tax returns). Over the course of your lifetime, you can give out
up to $12.92 million (for 2023) of your wealth as gifts before getting hit with the gift tax" (Dixon 2023
p7). Therefore, there is so much in gives that they would be able to give them until they are hit with
the gift taxes. In the event they decided to gift each one of their children and grandchildren they would
have to follow the above tax rules before the gift taxes apply.
In the event they wait to leave the estate to the family members the the estate taxes would apply and
each of them would have to pay a large chunk of taxes.
Ann and Bob have several options to consider in order to reduce their taxable estate consequence.
Annually, the amount of gift and estate taxes that are exempt are adjusted to account for inflation.
“The amount you can give during your lifetime, or at your death, and be exempt from federal estate
and gift taxes has risen from $12,060,000 to $12,920,000” for 2023 (Erskine, 2022). When you
consider this, Ann and Bob as a married couple, could potentially gift $25,840,000 in assets tax free in
2023. Ann and Bob do have a large family. When considering their children and grandchildren (22
members), it is very feasible that they could gift investments work $1,000,000 each (totaling
$22,000,000) with no tax implications. z Certainly, because the annual gifting limits are much smaller
than the lifetime amounts, gift tax returns would need to be filed should they gift the $1,000,000 to
each family member in one year. Certainly, staying under the annual amount of $17,000 (each) and
spreading the gifts out would be ideal as no gift tax return would need to be completed (Wilda Lin,
2021).
There are a few instances that gift tax limits don’t apply. Gifts designated for medical expenses paid
directly to a medical institution or insurance company qualify for an exception to gift tax limits (n.d.).
Similarly, gifts can be paid directly to education institutions and gift tax limits also would not apply if
the money was used for tuition (n.d.). z The IRS website also state that gifts to spouses and to political
organization for their use can be excluded from gifts (n.d.).
“Gifting appreciated assets, such as stocks or real estate, can be an effective way to avoid paying the
gift tax” (2023). Gift tax is based on fair market value at the time of the gift instead of basis or
original purchase price.
So, what would happen if Ann and Bob left a large estate to be divided among their children and
grandchildren? If the gift tax exclusion has been exhausted “the gift tax rate starts at 18% and can
reach up to 40% depending on your gift value” (Yusuf, 2023). Based on the asset numbers known, the
estate could fall in the highest 40% tax rate category. Certainly, with the value of their assets there
could be tax implications that could be avoided if they did not leave a large estate to be divided.
Ann and Bob should give priority to the annual exclusion gift amount which will be $17,000 for 2023
((Frequently Asked Questions on Gift Taxes | Internal Revenue Service, 2009). This means Bob and
Ann can EACH gift $17,000 to each child and grandchild without worrying about paying gift tax.
Each year that will be $748,000 ((17,000x2)x 22) that will reduce their estate and estate tax and they
could potentially have many years to make these gifts. They can also pay tuition or medical expenses
for their kids and grandkids. z As long as the payment is made directly to the institution, these expenses
do not qualify as gifts and will not be taxed as such and their taxable estate will decrease.
If Ann and Bob decide to gift one million dollars to each of their kids and grandchildren, they will be
taxed on the amount over the annual exclusion ($17,000 in 2023) and lifetime exclusion ($12.92
million in 2023). If they have not made any prior year gifts that go toward their lifetime exclusion
amount, they still might avoid paying any gift tax ((2020 Gift Tax Rates | What Are They? | Who
Pays?, n.d.).
If Ann and Bob decide to leave their entire estate to children and grandchildren after their death, their
gross estate will be taxed. They will miss out on any tax savings they could have had if they had
gifted portions to their descendants.
References
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taxes
2020 Gift Tax Rates | What Are They? | Who Pays? (n.d.). NerdWallet.
https://www.nerdwallet.com/article/taxes/gift-tax-rate
Erskine, M. (2022, November 7). IRS announces estate and gift tax exemption amounts for 2023.
Forbes. Retrieved March 2, 2023, from https://www.forbes.com/sites/matthewerskine/2022/11/04/irs-
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Trust & Will. (2023, January 27). Gift tax: 5 tips to avoid paying tax on gifts [updated 2023]. Trust &
Will. Retrieved March 2, 2023, from https://trustandwill.com/learn/gift-tax
Wilda Lin, J. D. (2021, August 3). Basic tax reporting for decedents and Estates. The CPA Journal.
Retrieved March 2, 2023, from https://www.cpajournal.com/2021/08/03/basic-tax-reporting-for-
decedents-and-estates/
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from https://useline.com/blog/your-guide-to-gift-tax-rates-in-2023/
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Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
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https://www.schwab.com/learn/story/estate-tax-and-lifetime-
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Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
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Governance and Performance: The Case of Family Trusts.” Journal of Corporate Finance, vol. 61,
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