Jones is seriously ill and has $3.1 million of property that he wants to leave t
ID: 2531591 • Letter: J
Question
Jones is seriously ill and has $3.1 million of property that he wants to leave to his four children. He is considering making a current gift of the property (rather than leaving the property to pass through his will). Assuming any taxable transfer will be subject to the highest transfer tax rate. (Refer to Exhibit 25-1 and Exhibit 25-2.) Required: Determine how much gift tax Jones will owe if he makes the transfers now.
If he makes a current gift, how much estate tax will Jones save if he dies after three years, during which time the property appreciates to $4.55 million?
(Enter your answers in dollars and not in millions of dollars.)
EXHIBIT 25-2 The Exemption Equivalent Year of Transfer Gift Tax Estate Tax 1986 500,000 500,000 1987-1997 600.000 600.000 1998 625,000 650,000 675,000 625,000 650,000 675,000 1999 2000-2001 2002-2003 2004-2005 2006-2008 2009-2010* 2011 2012 2013 2014 2015 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000 5,120,000 5,250,000 5,250,000 5,340,000 5,340,000 5,430,000 5,450,000 5,490,000 1,000,000 1,500,000 2,000,000 3,500,000 5,000,000 5,120,000 5,430,000 5,450,000 5,490,000 2016 2017Explanation / Answer
To provide a solution, it is necessary to make two vital assumption based on data provided in the question.
1. "Assuming any taxable transfer will be subject to the highest transfer tax rate" mentioned in paragraph 1 implies that Mr. Jones has already used his exemption equivalent. The reasons being that the top transfer tax rate applies only to current and future transfers. This assumption is critically to answering part a of the question.
2.Mr. Jones lives for three years. It is mentioned in paragraph 2 to calculate Jones' savings "if he dies after three years". The implication of this assessment is that if Jones were to die before the expiry of three years, gift tax on any current transfer would be included in his estate.
3. The problem or case relates to a situation existing prior to 2018.
Note :
Based on the facts of the case, and the assumptions, there will be four (4) annual exclusions of $ 14,000. This totals $56,000 ($14000 * 4). An annual exclusion of $ 14,000 (applicable till 2017) excludes modest gifts from the purview of Gift Tax. The annual exclusion is applied per donnee per year (Mr. Jones has four (4) sons). The annual exclusion pertains to a gift of a Present Interest ("a right to income or enjoyment of property currently"). This means that if the gift were to be made to a trust, it will not benefit the recipients (sons), and therefore, no exclusion will be allowed.
S.No. Details Current Gift $ Transfer at death $ A. Current value of property (given) 3,100,000 3,100,000 Less B Value of annual exclusion ($14000*4) 56,000 - C Net Current Value of Property - See Note 1 below 3,044,000 D Tax Rate at 40% (40% * D) 1,163,400 E Value transferred through Gift (C -D) 1,880,600 Add: F. Appreciation in value of property ($4.55 -$3.1 Million) in the interim 1,450,000 1,450,000 G Value transferred through estate ( A+F) - applicable to transfer at death - 4,550,000 Less :H Estate Tax @ 40% ( 40% on G) - applicable to transfer at death - See Note 2 below - 1,765,800 Answer : I After Tax Value transferred ( E + F) for currrent gift and (G-H) for Transfer (Answer (a)) 3,330,600 2,784,200 J Net Savings ( After Tax value transferred of Current Gift Less Transfer at Death)-Answer (b) 546,400 Note 1 Unified Tax Rate application for Gift Tax $ a. Tentative Tax 345,800 b. 40% of ($ 3,044,000 - $ 1,000,000) 817,600 Tax amount 1,163,400 Note 2 Unified Tax @ 40% for Estate Tax a. Tentative Tax 345,800 b. 40% of amount over $ 1,000,000 1,420,000 Total Estate Tax 1,765,800Related Questions
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