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.
References
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%20pr
operty.
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
