Pedro Bourbone is the founder and owner of a highly successful small business an

Question

Pedro Bourbone is the founder and owner of a highly successful small business and, over the past several years, has accumulated a significant amount of personal wealth. His portfolio of stocks and bonds is worth nearly $5,000,000 and generates income from dividends and interest of nearly $250,000 per year. With his salary from the business and his dividends and interest, Pedro has taxable income of approximately $600,000 per year and is clearly in the top individual marginal tax bracket. Pedro is married and has three children, ages 16, 14, and 12. Neither his wife nor his children are employed and have no income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax liability as well as to discuss the potential estate tax upon his death. You mention the possibility of making gifts each year to his children. Explain how annual gifts to his children will reduce both his income during lifetime and his estate tax at death. ORIGINAL WORK ONLY!!!

Explanation / Answer

In 2016, you can make an unlimited number of $14,000 gifts of cash or other property, completely tax-free. To ensure these tax savings, you need to remember only that no individual recipient can receive more than $14,000 in a calendar year.

For Instance, if you give $25000 to someone $14000 of it is exempt from gift tax, but you must pay gift tax on the remaining $11,000.

Further, a couple may combine their annual exclusion, means they can give away $28000 per year per recipient.

In the present case Pedro Bourbone can avail exclusion of $28000 by giving the gift to his each child and have consent of his wife.

Total Exclusion from His Income = $28000 x 3 child = $84000 each year

For deaths in 2016, everyone has a lifetime gift and estate tax exemption of $5.45 million, which means you, can leave or give away up to $5.45 million without owing any tax. This amount goes up every year to adjust for inflation.For the rest you can avail benefit of annual exclusions of giving gifts to children.

Further, in the present case all three children are minor that is below the age of 18.

To qualify for the annual exclusion from gift tax, a gift to a minor must satisfy these conditions:

a)      The recipient must receive the property outright by age 21.

b)      If the recipient dies before age 21, the remaining property must go to the recipient's estate or to someone the recipient named

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