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 actually 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 through the use of 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? b 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 won’t 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 don’t 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
principle 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’m just suggesting
things that go above and beyond what they were asking for. However, there is
no reason they shouldn’t 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.
