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 know as the unified transfer tax
system. The qualified gifts mention reduce 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 carryovered 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's 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
