ACCT 412 Week 7 Group Discussion Board Forum 4 Example

Group Discussion Board Forum 4: Transfer Taxes and Wealth Planning

ACCT 412 Corporate/Partnership/Estate Taxation, Group Discussion Board Forum 4

Thread by [Student Name]

The family, its assets and the classmates are composites; the exemption and exclusion amounts are from IRS Revenue Procedure 2024-40 and the July 2025 tax law, and the textbook, Scripture and research cited are real.

Walt and Carol Brennan, both 68, own a farm equipment dealership worth $12 million, with a tax basis of $2 million, a home worth $1.5 million and $8.5 million of investments, much of it appreciated stock bought decades ago. Their combined estate is $22 million. They have three children, one of whom works in the dealership, and seven grandchildren. They want to know how much estate tax their children will pay and whether they should start giving the business away now. Their current wills, signed in 2009, leave everything to a trust that was designed for a much lower exemption.

Spilker et al. (2018) explain that the estate tax applies to the taxable estate after deductions, and that the unified credit shelters transfers up to the basic exclusion amount. For 2025, that amount is $13,990,000 per person (Internal Revenue Service, 2024), and the July 2025 tax law raised it to $15 million per person for 2026, indexed afterward. If Walt dies first and leaves everything to Carol, the unlimited marital deduction means no estate tax at his death. If his executor files a timely return electing portability, Carol can add his unused exclusion to her own, giving her about $30 million of exclusion at 2026 levels, more than their entire estate. For this family, a correctly filed estate tax return at the first death is worth more than any trust. Without portability, the excess over Carol's own exclusion could face the 40% rate.

Because the estate tax may be zero, income tax becomes the main planning issue. Heirs take a basis equal to value at the date of death, so a sale of the inherited dealership would carry no income tax on its $10 million of growth. A lifetime gift, by contrast, carries the parents' $2 million basis to the children, who would owe capital gains tax on the appreciation when they sell. Giving the dealership away now would therefore save little or no estate tax and could cost the children over $2 million of income tax. The one argument for gifting is future growth: appreciation after the gift is removed from the estate, which matters only if the estate is likely to exceed the exclusion later.

Kopczuk (2007) studied estate tax returns and found that much estate planning happens late, often only after the onset of a terminal illness, and that estates shrink as people take planning steps near the end of life. Late planning is risky, because rushed transfers are more likely to be poorly documented or to miss elections such as portability. For the Brennans, the right plan is made now and is simple: wills that use the marital deduction, an instruction to the executor to elect portability, a succession plan for the child who runs the dealership and annual exclusion gifts for the grandchildren.

Proverbs 13:22 says that a good man leaves an inheritance to his children's children (English Standard Version Bible, 2001/2016). For the Brennans, honoring that verse means planning so that the business, and not only its value, passes in good order, with the tax rules used carefully and honestly.

Reply to Brooke

Brooke, your thread recommended that a client with a $20 million estate give $10 million of appreciated real estate to the children now, to lock in the exclusion before any future law change. That strategy made sense when the exclusion was scheduled to fall by half after 2025, because a gift made under the higher exclusion could not be clawed back later. The July 2025 law removed that deadline by setting the exclusion at $15 million and indexing it, so the urgency is gone. The cost remains. The basis cost of a gift, however, is unchanged by the new law. Spilker et al. (2018) explain that the recipient of a gift takes the donor's basis, while an heir receives a basis equal to fair market value at death. If the real estate has a basis of $3 million, the children receive $7 million of built-in gain, which at a 20% capital gains rate plus the 3.8% net investment income tax could cost about $1.7 million when they sell. Unless the client's estate is likely to grow well past twice the exclusion, that income tax cost may exceed the estate tax saved. For a $20 million estate under a $15 million exclusion, the estate tax at stake on the excess is $2 million at most, so the comparison is close even before any growth. Kopczuk (2007) found that people often wait too long to plan, so your instinct to act early is right; I would just redirect it toward a plan that preserves the step-up, such as gifts of cash or high-basis assets, while keeping appreciated property until death.

Reply to Ethan

Ethan, your thread described a grandmother who gives each of her six grandchildren $19,000 a year toward college, using the 2025 annual exclusion, and I agree that annual exclusion gifts are one of the simplest and most effective planning tools (Internal Revenue Service, 2024). Two rules from chapter 25 could make her plan more powerful. Both are easy to overlook. First, payments of tuition made directly to the school are excluded from gift tax without limit and do not use the annual exclusion at all, so she could pay a grandchild's tuition and still give $19,000 for books, housing or savings. Second, if she prefers to fund 529 plans, she may elect to treat a large contribution as if it were made over five years, front-loading up to five years of annual exclusions into one gift, which lets the account grow tax-free for longer. Spilker et al. (2018) note that gifts using the annual exclusion do not reduce the donor's lifetime exclusion, so these strategies move money out of the estate without touching the $15 million amount. There is one caution. Coordinating these gifts with the parents' own plans also avoids duplicate funding. If she pays tuition directly from a 529 plan rather than from her own funds, the payment is a distribution from the plan, not a direct-payment exclusion. With those rules, her generosity can go further for the same family budget. She should keep records of each gift and file a gift tax return for any year she elects the five-year treatment.

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Internal Revenue Service. (2024). Revenue Procedure 2024-40. U.S. Department of the Treasury. https://www.irs.gov/pub/irs-drop/rp-24-40.pdf

Kopczuk, W. (2007). Bequest and tax planning: Evidence from estate tax returns. The Quarterly Journal of Economics, 122(4), 1801-1854. https://doi.org/10.1162/qjec.2007.122.4.1801

Spilker, B. C., Ayers, B. C., Barrick, J. A., Lewis, T. K., Robinson, J. R., Weaver, C. D., Worsham, R. G., & Outslay, E. (2018). Taxation of individuals and business entities (Custom ed.). McGraw-Hill Education.