Question

Mr. and Mrs. Brown have never made a taxable gift. They have four children and ten grandchildren. Mr. and Mrs. Brown both have wills that leave their entire property to the other when one dies. They figure that there will be no estate taxes when the first spouse dies. What’s wrong with this strategy if they want their kids to enjoy their wealth after they are gone? What other things can you suggest to them to minimize their gift taxes?

Answer 1

As per the law, Except where a spouse is a noncitizen, neither lifetime gifts nor bequests at death to one's spouse are subject to estate taxes. However, the estate of the spouse will have to pay estate taxes on the spouse's entire taxable estate, including the amount transferred to the spouse pursuant to the lifetime transfer, at the spouse's death. Accordingly, this tool merely defers estate taxes; it does not entirely eliminate them. Thus, in this scenario, either of them have to pay estate taxes later on their lives.

However,  Each person can make annual gifts of $14,000 (15K for 2018) to any number of persons, typically children or grandchildren, without incurring a gift tax. If a husband and wife both engage in gifting, they can collectively give away $28,000 (30K for 2018) per year per recipient without incurring a gift tax. Over a period of several years the amount of money that can be transferred to a couple's intended beneficiaries under this method is substantial, thereby reducing the size of the taxable estate. Thus, Mr and Mrs Brown can choose to gift their property this way in parts over the years.