Gift tax now or estate tax later.While no one enjoys paying estate and gift taxes A combined federal tax on transfers by gift or death.When property interests are given away during life or at death, taxes are imposed on the transfer. These taxes, known as estate and gift taxes, apply to the total transfers that an individual may make over a lifetime. , it is often inevitable. A question frequently faced by wealthy individuals is whether it is better to make gifts now and pay the gift tax, or let the heirs inherit To receive property according to the state laws of intestate succession from a decedent who has failed to execute a valid will, or, where the term is applied in a more general sense, to receive the property of a decedent by will. inherit v. and pay estate tax. It may come as a surprise that, in many situations, paying gift taxes now can save a bundle To sell hardware and software as a combined product or to combine several software packages for sale as a single unit. Contrast with unbundle. See bundled software and bundling. of estate taxes later. The savings is a true savings that, given even minimum investment returns, grows greater with time. Under the uniform transfer tax, the rate of tax is the same for gifts made during lifetime as for assets left in the estate on death. However, paying gift taxes during lifetime has two major advantages. First, the asset gifted (and any future appreciation) is out of the estate. Second, the value of the gift tax paid is out of the estate if the donor The party conferring a power. One who makes a gift. One who creates a trust. donor n. a person or entity making a gift or donation. DONOR. He who makes a gift. (q.v.) lives beyond three years. Essentially, it is like getting a deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. for gift taxes paid during life. Example: S's net worth/potential taxable estate Taxable Estate The total value of a deceased person's assets that are subject to taxation - minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased. is $9,000,000. She has already made gifts to her daughter (D) using her full $600,000 uniform transfer tax exemption tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various , but has made no other gifts. S wants to give D a gift of $3,000,000 now, leaving her remaining estate to D at death. Assuming S lives more than three years after making the gift, the chart below compares making the gift now with leaving the entire $9,000,000 to D on S's death. For simplicity, all calculations ignore any exclusions for annual gifts of $10,000 or less. A comparison of the same estate 12 years later (having doubled in size) is also shown to illustrate how dramatically this technique can increase the amount of wealth passed on to heirs. S is able to leave $785,400 more to D by making the gift and paying the gift tax now. After 12 years, that difference has grown to $2,085,600. This makes lifetime gifting an extremely attractive tool. Before embarking on a strategy of substantial gifting, the first (of many) considerations should be whether it is better to forgo the gift to get a step-up in basis Step-Up In Basis The readjustment of the value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party . The basis of a gift to the donee The recipient of a gift. An individual to whom a power of appointment is conveyed. donee n. a person or entity receiving an outright gift or donation. DONEE. is the lesser of the donor's basis or the fair market value (FMV FMV - full-motion video ) of the asset at the time of the gift, plus an increase for any gift tax paid. The basis of most assets inherited inherited received by inheritance. inherited achondroplastic dwarfism see achondroplastic dwarfism. inherited combined immunodeficiency see combined immune deficiency syndrome (disease). is the FMV at the date of death. This strategy of substantial gifting works best for assets with a high basis (including cash).
Lifetime Gifting
Scenario 1: Scenario 2:
gift now no gift now
Current taxable estate $9,000,000 $9,000,000
Amount of gift (3,000,000) 0
Gift tax on gift (1,428,000) 0
Remaining estate (A) 4,572,000 9,000,000
Plus prior gifts made 3,600,000 600,000
Taxable estate 8,172,000 9,600,000
Estate tax 4,135,400 4,920,800
Less unified credit (192,809) (192,800)
Less prior gift tax paid (1,428,000) 0
Total estate tax (B) 2,514,600 4,728,000
Balance to daughter
(A) - (B) 2,057,400 4,272,000
Prior gifts to daughter 3,600,000 600,000
Total assets to daughter $5,657,400 $4,872,000
Scenario 1: Scenario 2:
12 yrs. later 12 yrs. later
Current taxable estate $ 9,144,000 $18,000,000
Amount of gift 0 0
Gift tax on gift 0 0
Remaining estate (A) 9,144,000 18,000,000
Plus prior gifts made 3,600,000 600,000
Taxable estate 12,744,000 18,600,000
Estate tax 6,787,200 10,300,800
Less unified credit (192,800) (192,800)
Less prior gift tax paid (1,428,000) 0
Total estate tax (B) 5,166,400 10,108,000
Balance to daughter
(A) - (B) 3,977,600 7,892,000
Prior gifts to daughter 7,200,000 1,200,000
Total assets to daughter $11,177,600 $ 9,092,000
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