Ann and Bob have a large family and look to distribute some of their money to their family. The
money outside of the real estate property could be gifted to the family by gift splitting and
potentially gifting $32,000 to each of their family members over only a couple of years. "Both
spouses can claim a $16,000 per donee exclusion although only one spouse actually makes the gift,
and the spouses can give each done a total of $32,000 before either spouse’s gift becomes taxable”.
(Pearson, pg.12-4) If there are 7 children and 15 grandchildren, they could potentially gift $704,000
a year until. "Another important advantage of lifetime gifts is that their value is frozen at their date-
of-gift value. That is, any post-gift appreciation escapes the transfer tax rolls. Consequently, transfer
tax savings are maximized if the donor gives away the assets that appreciate the most"(Pearson, pg.
12-29). Stocks that have appreciated rapidly could be gifted first and negate the tax liability of
appreciated assets. The real estate property valued at $100,000,000 could setup a “testamentary
trust creating successive life estates" and split it amongst the 15 grandchildren and their children.
"Under this arrangement, an estate tax would be imposed at the death of the person establishing
the trust but not again until the great grandchild’s death"(Pearson, pg. 13-6). Estate tax would be
imposed once every other generation and could help reduce estate taxed being paid at the time of
each generation's death. If Bob and Ann gifted $1,000,00 to each of their children and
grandchildren, they would have to pay gift tax on each of the donations over the exclusion amount
and doner would also have to recognize the tax. It would not be an efficient tax strategy and they
would incur a large gift tax. The consequences of leaving a large estate divided amongst the children
and grandchildren could potentially cause chaos in the family. The property is valued at
$100,000,000 and the several million in stocks, cash and bonds could cause interfamily
disagreements over inequal distribution of wealth.
Ann and Bob have several tools available to them to distribute wealth to their family members. They
currently have 22 family members that they each gift $17,000 using the gift splitting election in
2023, which is a total of $34,000 to each family member. That is $748,000 per year of exclusions
that will reduce their estate tax base. It could possibly be more if Ann and Bob choose to give
$34,000 to the significant others of the family members. There are statutory exemptions under
2503(e) that allow gifts for medical expenses and tuition so long as they are paid directly to the
intuition instead of the individuals receiving the treatment or education. Gifts and inheritances are
part of the wealth transfer tax system which is also known as the unified transfer tax system. The
qualified gifts mention reduces their transfer tax base. Upon the gift date the donee will assume the
donor's basis and the doner will have that value frozen for use in his tax basis. It would be beneficial
to gift assets speculative to appreciate the most to maximize transfer tax savings. A possible benefit
to giving assets is the donee being in a more favourable tax bracket thus paying less on the returns
of assets than Bob and Ann would.
As of 2023 the basic exclusion amount is $12,290,000 each for Bob and Ann, so a total of
$24,580,000. This means they will not pay taxes on transferring $24,580,000, and the exclusions
mentioned will not reduce the $24,580,000. Upon one spouse death they should ensure that they
make their credit portable to take full advantage of the exclusion if not fully used upon their death.
Electing portability transfers the unused credit to the surviving spouse. Upon inheritance the heir
will assume a stepped-up basis on the asset instead of the carryover basis assumed with a gift. For
instanced the ranch might have been purchased and appreciated in value. If gifted, it carries overed
the cost basis from Ann and Bob. If inherited, the stepped-up basis is the FMV.
Through taking advantages of wise exclusion timing through gifts and maximizing the unified credit
Bob and Ann can minimize taxes paid on their transfer of wealth to their family. If they gift
$1,000,000 in 2023, they would have $3,328,000 left of their lifetime exclusion remaining and their
estate would be subject to estate taxes beyond that amount.
References
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
What is new - estate and Gift Tax. Internal Revenue Service. (n.d.). Retrieved March 1, 2023, from
https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
Gift Taxes. Pearson+. (Pearson's Federal Taxation). Retrieved March 2, 2023, from
https://plus.pearson.com/courses/301c22ce26cf4c8cba2fd88f7eaf1093_d2l_snhumlp/products/173
542/pages/630?locale=&platformId=1030&isTpi=Y&lms=Y
Gift tax. Internal Revenue Service. (n.d.). Retrieved March 2, 2023, from
https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax
