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.
For instance the tax payer needs to make as many gifts to all heirs to their estate throughout the years.
That reduces the estate amount and tax liability in the long run. I would compensate this with different
trusts options and charities. With the taxpayers having some income from investments and a ranch.
The use of establishing a grantor retained annuity trust could be beneficial. GRATS are used when the
estate has consistent incomes, where a Grantor Unified Trust is used when the income is inconsistent.
Both are good ways to prolong the tax to the heirs by placing income producing assets in a trust for a
period. While in the trust the heir gets the income and when it expires, they receive the asset and
income. This method can delay the tax for a period although does not take decrease the taxable value
fully from trust. There are also different types of charity-based trust. A Charitable Remainder Trust for
highly appreciated assets due to the fact they save and avoid capital gains taxes and estate taxes. The
main thing with all these options is hire a professional to guide you through the whole process to
insure the correct options between, Charities, Trusts, Gifts. Proper and early planning can make a
tremendous difference when it is all said and done.
Wealth transfer has tax implications. If the donor is alive, gift taxes are imposed if they are above the
individual threshold of 12.06 million. If the donor is not alive, estate taxes would be imposed. Gift tax
is the donor’s responsibility. Ann and Bob are inquiring on the tax consequences of leaving behind
large estate to their children and grandchildren. According to IRS’s ‘Estate Tax’ publication, if the
estate amount exceeds $12,920,000 (for the year 2023), then there will be estate tax. This estate tax
may range from 18% to 40%. Estate taxes are paid on gross estate, which is derived from total estate
value minus: debt and expenses (e.g. funeral expenses), charitable transfers, transfer to U.S. citizen
spouse, and federal estate tax liability (Garber, How to Calculate Your Estate Tax Liability).
Ann and Bob are trying to reduce the taxable estate mentioned above by gifting investments worth
$1,000,000 to each of their 22, children and grandchildren. In 2023, the annual gift tax exclusion
amount is $17,000. Which means that per child/grandchild, Bob and Ann and can gift them $17,000,
each without being taxed. That means each child/grandchild can receive $34,000 each without being
taxed. Thus, investment gifts of $1,000,000 exceeds this amount, and the exceeding amount will be
taxed. If Ann and Bob would like alternate options to distribute wealth, they could provide tuition or
medical expenses of their children/grandchildren (IRS, FAQ on Gift Taxes). These provisions are
excluded from gifts. The best way for Ann and Bob to reduce their estate tax while also reducing gift
taxes is by spreading out the gifts to their children/grandchildren. Instead of gifting a lump sum in one
year, they should spread the $1,000,000 investment gift to several years to take the benefit of $34,000
($17,000 + $17,000) gift tax exemption.
What a nice nest egg Bob and Ann have accumulated over their life thus far, I can only dream of being
in a similar financial setting at that age. To boot they are willing to share their wealth with their
children and grandchildren.
Estate tax, also known as death tax, can be scary for many. Scary as it sounds, a vast majority of
people will never apply it. Why, because the federal estate tax has an extremely high exemption
amount, which is 12.92 million for 2023 exemption amounts. z This doesn’t mean there cannot be taxes
levied because there are some “taxes levied by some states to contend with in certain parts of the
country.” (Dixon, 2023)
A few alternatives to reduce/avoid taxable estate fees:
Gifts to Family
Set up an irrevocable life insurance trust
Make charitable donations
Establish a family limited partnership
Fund a qualified personal residence trust
Parents and grandparents who want to gift assets or wealth from one generation to another can
establish “trust funds to avoid tax implications on gifts that exceed the annual gift exclusion (Kagan,
2022)”. “A gift in trust is a special legal and fiduciary arrangement that allows for an indirect bequest
of assets to a beneficiary (Kagan, 2022)”
On the other hand, if Bob and Ann leave their large amounts of wealth and assets until they are both
deceased the descendants should consider selling any assets and then gifting the sales proceeds.
Another option would be to transfer the asset/property to a trust with rights to receive annuity
payments for a period. When the payment period ends the remaining trust asset/property will pass to
the beneficiaries – family members. (AICPA 2021)
AICPA (March 2021) Gift Tax Strategies Retrieved from: https://www.360financialliteracy.org
Dixon, Amanda (February 2023) 5 ways the rich can avoid the Estate Tax Retrieved from:
https://smartasset.com/
IRS (February 2023) Estate and Gift Taxes Retrieved from: www.irs.gov
Kagan, Julia (December 2022) What is a Gift in Trust, how does it work, Pros & Cons Retrieved from:
https://www.investopedia.com/
Garber, J. (2021, December 28). Will your estate owe estate tax? The Balance. Retrieved March 1,
2023, from https://www.thebalancemoney.com/how-to-calculate-your-estate-tax-liability-3505645
U.S. Department of Treasury. (n.d.). Estate Tax. IRS. Retrieved March 1, 2023, from
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
U.S. Department of Treasury. (n.d.). Frequently Asked Questions on Gift Taxes. IRS. Retrieved March
1, 2023, from https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-
questions-on-gift-taxes
Gift Tax. Internal Revenue Service. (n.d). Retrived March 2, 2023
https://www.irs.gov/businesses/small-businesses-self-employed/gift-
tax#:~:text=The%20gift%20tax%20is%20a,of%20any%20type%20of%20property.
Mark Fonville.CFP (2022. (How To Avoid Estate Taxes with A Trust
https://www.covenantwealthadvisors.com/post/how-to-avoid-estate-taxes-with-a-trust
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
