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 donee 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 favorable 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 won’t pay taxes on transferring $24,580,000, and the exclusions
mentioned won’t 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 carry 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.
When evaluating the situation for Ann and Bob to reduce their taxable estate there are a few
alternatives. Assuming their investments are worth $3,000,000 and the ranch valued at $100,000,000
would be a total of $103,000,000. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the tax-free
amount (known as the basic exclusion amount) to $11.18 million beginning in 2018. This increased
amount, indexed annually, will continue through 2025 (Anderson, Hulse & Rupert 2023). The 2019
amount is $11.4 million, the 2020 amount is $11.58 million, the 2021 amount is $11.7 million and the
2022 amount is $12.06 million (Anderson, Hulse & Rupert 2023). This means in 2022 Ann and Bob
can gift $12.06 million each that is tax free.
On assumption would be to gift their ranch in Texas to every member which there are 22. The limit
for each gift usually changes each year, but in 2021 it is $15,000 (AICPA 2021). Spouses can elect to
give up to $30,000 to one person (AICPA 2021). There are 22 family members which means that
Ann and Bob can give each person $30,000 in 2021. This would result in $660,000 of tax-free gifts to
all the children and grandchildren and reduce their estate tax. If they gift each child and grandchild
$1,000,000 they would have to pay tax on the difference of both exclusions if applicable and the 1
million. Generally, they would be taxed on $970,000 per person if the exclusion of $12.06 million has
been used.
Since Ann and Bob have 15 grandchildren they can if they are trying to the can take there $1,000,000
gift to each grandchild and help them with school or medical bills which is a qualified transfers
exclusion. In addition… you can also provide an unlimited amount for qualified tuition or medical
expenses to an individual (AICPA 2021). You must pay the amount directly to the education or
medical care provider (AICPA 2021). I thought you were able to also donate money to 529 college
plans for young children. This could be a way to give money out without having to pay additional
taxes.
The consequences of large estates is that if not properly planned the estate could end up owing a lot
of taxes.
References:
Anderson, Kenneth E., Hulse, David S., Rupert, Timothy J. (2023). Pearson’s Federal Taxation 2023
Corporations, Partnerships, Estates and Trusts. Pearson Education Inc. Hoboken, NJ.
AICPA (March 29, 2021). Gift Tax Strategies. 360 Degrees of Financial Literacy. American Institute
of CPAS. https://www.360financialliteracy.org/Topics/Working-with-a-CPA/Credits-
Deductions/Gift-Tax-Strategies
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
