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. c 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. c Scary as it sounds, a vast majority of
people will never apply it. c Why, because the federal estate tax has an extremely high exemption
amount, which is 12.92 million for 2023 exemption amounts. This does not 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)
The first thing that one always thinks about is the estate and gift tax exemption. Erskine (2022)
explains that, in 2023, there is an annual gift tax exemption of $17,000 per person, as well as a
lifetime exemption of $12.92 million per person. This is the first clear way that Ann and Bob can
transfer their wealth. They can transfer a gift worth $34,000 to each heir this year, and that is use it
or lose it, so there is zero reason that they should not take advantage of it. Furthermore, that is a far
cry from the $1 million they are trying to get to their children/grandchildren; however, they are
going to get this kind of inflation-adjusted exemption every year. They can take advantage of it, and
if they live for several more decades, they can offload a lot of that property tax-free. Continuing,
they have roughly $26 million worth of lifetime exemption that they can use any time. If they want
to give each child and grandchild a million dollars, this is how they should do it. Once this lifetime
exemption runs out, it is gone. They should use it soon though, considering the exemption is set to
go down significantly come 2026. If this wasn’t the case, it may not be as pressing to use up the
exemption so quickly. However, because this is the case, it may be smart to accelerate the transfer
process faster and maybe start dividing up that land. It is up to Ann and Bob, but they need to be
aware that using trusts, they can transfer assets and still largely control the assets. They have
significant wealth, and the tax burden is going to be very large. It is pressing that they are
completely aware of the situation, and hear our recommendation so they can better set their goals.
All in all, they can give everyone more than they wanted to with this option, and it is by far the best.
So where is that going to leave them? c Anderson et al. (2023) explains that the gift tax and the
estate tax are one in the same. With that in mind, after they use it now, there will not be a lot to
stop tax consequences when they die. That means we need to be proactive now to try and transfer
more if the client wants that, since they probably do not want the ranch broken up in order to pay
tax on it. If the ranch is a business that earns money, the parents can loan adult children money, and
then the children can immediately purchase a chunk of the farm. As their piece of the business
earns money, they pay interest and principal back to the parents, and over time they start to own
more and more of the land with minimal tax consequence. At this point, I am just suggesting things
that go above and beyond what they were asking for. However, there is no reason they should not
consider accelerating things since there is such high motivation to find tax breaks. They can always
make sure they themselves have plenty of money to do the things they want to do. Beyond that,
they want to give it to who they want to give it to in the most efficient way possible.
Erskine, M. (2022). Forbes. IRS Announces Estate and Gift Tax Exemption Amounts For 2023.
Retrieved from: https://www.forbes.com/sites/matthewerskine/2022/11/04/irs-announces-estate-
and-gift-tax-exemption-amounts-for-2023/?sh=5532c05c2817
Anderson, K., Hulse, D., and Rupert, T., Prentice Hall’s Federal Taxation 2023 Corporations,
Partnerships, Estates & Trusts. 2023.
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 c Retrieved from:
https://www.investopedia.com/
