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Jones is seriously ill and has $3 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: a. Determine how much gift tax Jones will owe if he makes the transfers now b. 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 $4.5 million? (For all requirements, enter your answers in dollars and not in millions of dollars.) a. Amount of gift tax b. Amount of estate tax savingsEXHIBIT 25-2 The Exemption Equivalent Year of Transfer Estate Tax S 500,000 S 500,000 600,000 625,000 650,000 675,000 1.000,000 1,500,000 2.000,000 3,500,000 5.000,000 5,120,000 5,250,000 5,340,000 5.430.000 5,450,000 5.490.000 11,180,000 Gift Tax 1986 600,000 625.000 650,000 675.000 1.000,000 1.000,000 1.000,000 1,000,000 5,000,000 5,120,000 5,250,000 5,340,000 5.430,000 5,450,000 5.490.000 1987-1997 1998 1999 2000-2001 2002-2003 2004-2005 2006-200S 2009-2010 2011 2012 2013 2014 2015 2016 2017 2018 11,180,000 The applicable credit and exemption is zero for taxpayers who opt out of the estate tax in 2010.

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Answer: a. Amount of gift tax b. Amount of estate tax savings624,000 $1,176,000 Explanation Calculation of the tax savings and the net amount transferred to the children under both scenariOS Current Gift Transfer at death 3,000,000 Current value of propert Less: gift tax on transfer (40% Value transferred via gift Appreciation during interim Value transferred via estate Less. Estate tax at 40% After tax value transferred 3.000,000 S (1,176.000) 1,824,000 1,500,000 1,500,000 4,500,000 (1,800,000) 2.700,000 3,324.000 S Tax savings and extra value transferred = 624,000 There are two critical assumptions here. First because the top transfer tax rate applies to all transfers (currently and for future transfers), it would appear that Jones has already used his exemption equivalent. Second, Jones survives at least three years (otherwise, the gift tax on any current transfer would be included in his estate). Under these assumptions a current gift of S3 million will result in a taxable gift of $2,940,000 (after four annual exclusions 4* $15000) and a gift tax of $1,176,000. In contrast, the same propcrty transferred via the cstatc will trigger $1,800,000 in estate taxes. The difference in the amount transferred ($624,000) represents the $24,000 savings from the annual exclusions ($60,000 x 40%) and the $600,000 of estate tax on the $1,500,000 of appreciation. Created by Universal Document Converter

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