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
