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.
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 is 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.
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). Retrieved 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
