Final Project Part II
Introduction - Background
T Int R Service (IRS) has intr the Gift Est T la .
T law ar highly comple in natur .
O the ultr -wealthies population of America is impact by the Gift Est T
.
A gift encompasses tr money or pr without having
of partial compl compensation.
T gift which low than $ 17,000 not ta in the U.S.
E t r to the t that ar levied after the tr of est and t r
applicable on them (M & W ,2023).
Estate and Gift Tax Liability –The Annual
Exclusion
F t year 2023, the gift amount that is e from gift t is $ 17,000 (Internal
R S , 2023).
T f tax that has been set as the threshold f the year 2023 is $ 12.92
f individuals.
F r ar on est , using gifts is consider to be a viable
.
B split esta or assets, and giving as a gift, it is possible give individual $
17,000 any t impli .
Contd..–Gift Tax
Deductions
T gift t that been set the I R
S r betw 18 % t 40 % in the U.S.
T gift t a spouse is a citiz of the Unit St not
.
H , the is a of the U S ,
r gifts is $ 1,75000 for
year 2023 (I R Service, 2023).
G made political f its utiliz ar also
.
M tui ar paid f someone
t .
G to ex from (IRC§ 2522).
Contd.. –Marital Deduction vs Unified
Credit
Marital Dedications
Unified Credit
The gifts from married couples doubles the
exclusion.
It is of cardinal importance when it comes to
estate planning.
Based on the annual exclusion amount for
the year 2023, the gift exclusion can be up
to $ 34,000 (i.e. $ 17,000 + $ 17,000)
It can act as a vital strategic tool that can
help to reduce tax.
Any amount of gift can be paid to a spouse
provided he or she is a U.S. citizen without
giving rise to any tax implications.
Unified credit decreases the total value of
the amount, thereby reducing the amount
of estate tax that is charged.
In the spouse if not a U.S citizen, the limit
that has been set by the IRS is $ 1,75000
Taxed gifts are included in the estate
Contd..–Family Limited Partnership vs
Intentionally Defective Grantor Trust
Family Limited Partnership
Intentionally Defective Grantor Trust
They act as vital instruments that can
lower the tax amount
IDGT involves the complete transfer of
property to a trust for tax transfer.
It has been used by wealthy families to
pass down their wealth to future
generations by reducing tax.
Incomplete transfer can lead to income
tax.
The proceeds from family limited
partnerships are excluded from tax.
The grantor has to pay the tax for the
trust’s income
Contd..–Comparison of IDGT with FPL Strategy
IDGT FLP
Particulars
Year 1
Year 2
Particulars
Year 1
Year 2
Boutique Value
1,00,00,00,000
1,00,00,00,000
Net value of boutique
1,00,00,00,000
1,03,00,00,000
Net value of
boutique
1,00,00,00,000
1,00,00,00,000
Interest sold (10 %)
10,00,00,000
10,30,00,000
Interest sold (10
%)
10,00,00,000 10,00,00,000
Net Income
1,50,00,000 1,50,00,000
Net Income
1,50,00,000 1,50,00,000
Federal Income Tax
(35 %)
52,50,000
52,50,000
Federal Income Tax
(35 %)
52,50,000 52,50,000
Net remaining
97,50,000
97,50,000
Net remaining
97,50,000 97,50,000
Amount received by
trust
97,50,000
97,50,000
Amount received
by trust
1,50,00,000 1,50,00,000
Accumulated amount
of trust
9,47,50,000 1,95,00,000
Accumulated
amount of trust
1,50,00,000 1,50,00,000
Retained amount by
FLP
9,02,50,000 9,32,50,000
Retained amount
by IDGT
9,47,50,000 9,47,50,000
Contd..–Rationale for strategies
I the cont of the client, under FLP, $ 560000 ex from in Y 1 along
proc .
U the IDGT approach, the gr to pa ta and the trust will be charg
t .
T 10 % of inter that is sold is not consider for t purpose.
O of both the av s , In Def Gr T (IDGT) a
alterna .
IDGT not consider 10 % int that is sold f gift t c .
Tax Planning Strategy - Insurance
W lif is transf to chil is reg to be a gift
A to IRS, lif ex $ 14,000 is ta .
I case the value of a tr policy is $ 30,000, tax is char on $ 16,000.
I aft the demise of tr , insur $ 300000 ta c be
.
P be tr thr Irr Lif I T (ILIT) (P , 2019).
T policy proceeds are not subject to es t under ILIT.
Contd..–Annuities
A r t a type of insurance based in which inves entitl to sever
payments.
T dat as well as the t is fix .
A ar of two types –C annuities and Priva annuities.
A annuity is sold by insur companies and an receives y
their lif or specified number of year .
A annuity is an ag betw an who assets t
individual that he can r r paymen in ex (Bishnu &
K , 2022).
Contd..–Charitable giving
C giving is a s r ta .
T pla a car rol to ensur benefits can ari r to t .
C donations hav t be mad bef a financial year comes to an end.
T donations that ar made to applicable charities that ar r the IRS ar
deductible.
IRS 501( )(3) lists or that are iden as charities (I R
S , 2023).
Contd..–Summary
I the real es scenario that has been present , the most appr
cr of an Intenti Def Gr T (IDGT).
T benefits of the grant c be maximiz .
T burden of tax c get shift the trust assets (P , 2023).
H can tr his liability rela to i tax the IDGT.
T str approach c str cashflo along with liquidity the gr .
Contd..–30 years projections and tax
savings
Projects for 30 years
Increase in annual value = 3 % of 1 billion = $ 30 million
Yearly exclusion = $ 5.4 million
Yearly gift tax at 40 % = $ 24.6 million * 40 %
Interest at 10 % = $ 100 million
Annual amount = $ 100 million
–$ 24.6 million * 40 %
Value estimation after 3 decades is $ 2.7 billion
Intentionally Defective Grantor Trust tax = $ 560 million and Family Limited Partnership tax = $
961 million
Tax savings
$ 961 million
- $ 560 million
=
$ 401 million
Risk Analysis - Penalties
P is a serious risk that ma arise in est p while using gifts.
T inability to pa gift tax i a timely manner can give rise t penalty
T penalty that is char is ta amount and 5 % pe month due to negligence.
T penalty ra can incr to 25 %
T IRS C § 6662 light on the imposition of accur -rela
underpa .
I an kind of negligence f the pe that is applied could be as high 40 %.
Contd..–Interest and Ethical
Consideration
W it comes t ta planning, adher t ethical
.
I a special sin int tax c be
.
E s hav been down Section 10.21 the T D
C 230 of high .
I cont tha pa to f .
P responsi mak th clients of an pos o
r tax rela r (IRS).
T adoption is high significance making
planning applic rules be .
Conclusion
I the real es industry, planning of tax is ins .
T use of appropria str and instr c enable clients to r
of money that they ha t pa as t .
M , the st , la , and rules that ha been laid down by the Internal
R S (IRS) need to be complied with so that tax be saved an ethical
.
I the cont of the client with assets worth $ 1 billion, the ideal that c be used
r tax is In Def Gr T .
I can minimiz ta oblig for the client in an ethic manne .
Reference
B , M., & K , C. (2022). A the of estat . M Dynamics,26(3), 800-812.
E requirements - 501(c)(3) (2023) I R Service. A :
://ww . .g /charities-non-profits/charitable-org /e -requirements-501c3-
(A : 24 J 2023).
F ask qu gift taxes nonre not citiz of the United States (2023) I Revenue
S . A at: http ://www. .gov/businesses/small- - -e /frequently-a -question - -
- -f -nonresidents-no -citizens- - -united- (A : 24 J 2023).
G & in 1 (2023) I R Service. A at: https://www. .gov/f /interes - -ot -
- - /gifts-inheritances/gifts-inh -1 (A : 24 J 2023).
M , E., & Wilson, D. J. (2023). T billionaires: Estat tax geographical location of the -
. A Ec Journal: Ec P ,15(2), 424-466.
P , S. (2019). R the I Lif Insurance T as the D in E Plannin . J of Fin
S Professionals,73(2).
P , K. (2023). G T : T MVP the IRC. E Planning & Community Property L Journal,15(1), 92-136.
T Department regula governing practice the internal ... IRS A : http ://www. .g /pub/irs-
/pcir230.p (A : 24 J 2023).
