Ann, age 61, and Bob, age 62, have a large number of investments in common stock

Question

Ann, age 61, and Bob, age 62, have a large number of investments in common stock of publicly traded corporations, some municipal bonds, and a money market cash account worth several million dollars. In addition, they own a ranch in Texas that may be worth $100,000,000. They have a large family consisting of three sons, four daughters, and fifteen grandchildren. What are some alternatives that Ann and Bob could consider in order to reduce their taxable estate, assuming that the estate tax law is not yet abolished or amended by Congress before the two taxpayers die? What are the consequences if Ann and Bob decide to gift investments worth $1,000,000 to each of their children and grandchildren? What are the consequences of leaving a large estate that will be divided among their children and grandchildren?

Explanation / Answer

Ways to minimise Estate Tax

1) Generation skipping: Generation skipping is exactly as it sounds. In countries that allow it, many people will often choose to transfer a portion of their estate assets to their grandchildren rather than transferring the full estate directly to their immediate children. This strategy skips the second generation, and transfers the assets straight to the third generation, which saves the assets from being eventually taxed twice. Normally the assets would be taxed once when transferred from you to your children (second generation) and again when your children transfer it eventually to your grandchildren (third generation).

2) Valuation Discounts : Valuation discounts can be an area where you can find significant tax savings if you own a business or assets that are difficult to value. In general, when assets are transferred, a tax will be applied to the fair market value of the assets, but if the fair market values of your assets are hard to determine, there may be certain discounts that can be applied to reduce the taxable value of your transferring assets.

3) Charitable Gratuitous Transfers : In many estate plans, individuals will often set aside assets to give to a charity upon their death. But is it better to donate assets to charity when you die or while you are still alive? Often, in many cases, it is most advantageous to the charity to donate during your lifetime. This is because most countries do not levy gift taxes on charitable donations, and second, you can get an income tax deduction for your donation.

So, gifting $1000000 to each of grandchildren will reduce the liability of Estate tax. But if the couple transfer share to children, then estate tax has to be given by children upon inheritance.

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