Question

Estate Finance Family Tax Plan Question

You are in a meeting with Mr. Attorney and Mr. Client about Mr. Client's estate planning. Mr. Attorney is great at drafting wills and is an expert on state fiduciary law but has some gaps in his knowledge of gift and estate tax. Understanding this, Mr. Attorney asks you to correct him if he says anything wrong or to chime in if you have any suggestions. Mr. Client is a very wealthy and important client with a net worth of approximately $200 million. Mr. Client has no remaining lifetime gift and estate tax exclusion and is deciding whether to make a gift of a $10 million vacation home to his son or leave the vacation home to his son in his will. Mr. Attorney says "it's only going to cost you $4 million of estate tax to give away the $10 million vacation home at your death. So, there's really no advantage to giving it away now and having to pay $4 million of gift tax."

Based on the information above, please answer the following questions:

• Is there anything you would say during the meeting after Mr. Attorney's comment?
• Is Mr. Attorney's statement correct?
• How would you advise Mr. Client in deciding whether to make the gift?
• What are the pros and cons of making the gift now instead of waiting?

Answer 1

Answer to Question 1st and 2nd is done together

Currently Estate and Gift tax exemption limit is $11.4 million if the gift is in the form of an estate an made to heir.

In the given case Mr client want to gift a vacation house to his heir which is valued at $10 Million

So irrespective when the Gift is made i.e Gift it now or gift the vacation home in his will the same is not taxable provided the value of the estate dose not exceed the exemption limit of $11.4 Million

Hence based on above Mr attorney is not correct in his advice to Mr Client.

And for Question 3rd and 4th:

As per financial consideration is in point there is not much of a difference in Gifting an estate to an heir under a value of $ 11,4 Million. however if advantage is consider it would be advisable that the gift should be made via a will or irrevocable trust.

Capital advantage can be explained via an example if Mr client make's a gift now it will not be taxable neither in the hands of Mr client nor in the hands of his son but consider a scenario where his son his selling the property, lets say for an amount of $15 Million and cost of the property in the hand of his son will be consider as $10 Million and thus there will be a capital gain tax on $5 Million

But if the gift is made after the death of Mr client i.e through his will and at that time value of property is appreciated to $11 Million then the cost of the property in the hands of Mr client's son will be $11 million thus saving a capital gain tax on $1 million.

Above reason and example is also a con to gifting during his life time

above answer is based only on consideration to financial factors

and the Limit of $11.4 Million will be increased based on appreciation in property value so it is really advisable to Mr client to gift the property in his will.