ACC 6060 Module 7 Written Assignment: Gift and Estate Tax Example

Give Now or Leave Later? Taxable Gifts, a Hypothetical Estate and the Basis Trade-Off for a Morristown Widow

Student Name

Master of Science in Accounting, Thomas Edison State University

ACC-6060: Federal Taxation

Mentor Name

Month Day, Year

Give Now or Leave Later? Taxable Gifts, a Hypothetical Estate and the Basis Trade-Off for a Morristown Widow

Introduction

The gift tax and the estate tax share one rate schedule and one lifetime exemption, $13,610,000 per person in 2024, applied through a unified credit (Internal Revenue Service, 2023). Each year, gifts up to the annual exclusion, $18,000 per recipient in 2024, are ignored, and tuition or medical bills paid directly to the provider are excluded without limit. Taxable gifts accumulate over a lifetime and are added back when the estate tax is computed, so that transfers are taxed once at progressive rates no matter when they are made (Spilker et al., 2019).

Part A: Sorting the 2024 Gifts

The tuition is excluded only because she paid the university; a check to her grandson would have used his annual exclusion instead. The 529 election spreads the contribution over five years, so it uses $5,000 of the granddaughter's exclusion each year. Helen must file Form 709 by April 15, 2025, because her gifts to two recipients exceeded the exclusion.

Part B: Computing the Gift Tax

Rates reach 40 percent above $1,000,000, so tentative tax is $345,800 plus 40 percent of the excess. No tax is paid, but the credit used shrinks what remains for her estate.

Helen could have reduced her taxable gifts by electing gift splitting if she were married, treating each gift as made half by each spouse and doubling the exclusions. As a widow she cannot, but she could spread larger gifts across two calendar years, giving $18,000 to each child in December and again in January, to use two years of exclusions within a few weeks.

Part C: Her Estate, If She Died at the End of 2024

The insurance is included because she held the right to change beneficiaries; had an irrevocable trust owned the policy for more than three years, it would be outside her estate. If her late husband's executor elected portability, his unused exemption would be added to hers. New Jersey repealed its estate tax in 2018 but keeps an inheritance tax, from which children and grandchildren are exempt.

Her executor would file Form 706 within nine months of death only if the gross estate plus adjusted taxable gifts exceeded the filing threshold, $13,610,000 in 2024. Helen's $13,224,000 total would fall just below it, though an executor might still file to elect portability or to document values for the heirs' basis.

Part D: The Basis Trade-Off

Her son takes her $30,000 basis in the gifted stock, so a sale at $100,000 produces $70,000 of gain. Had he inherited it, his basis would step up to its value at her death and the gain would vanish. With her estate well below the exemption, giving cash or high-basis assets and keeping low-basis stock until death would save the family income tax. Legislation enacted in 2025 set the exemption at $15,000,000 for 2026, indexed after that, which keeps estates like hers outside the tax. Kopczuk (2013) reviews evidence that wealthy families respond to transfer taxes mainly through the timing and form of transfers, as this analysis does.

A simple rule follows for Helen's plan: give assets with high basis relative to value, such as cash or recently bought securities, and keep assets with large built-in gains, such as long-held stock and the residence, so that they receive a stepped-up basis at her death.

References

Internal Revenue Service. (2023). Revenue Procedure 2023-34: Inflation adjusted items for 2024.

Kopczuk, W. (2013). Taxation of intergenerational transfers and wealth. In A. J. Auerbach, R. Chetty, M. Feldstein, & E. Saez (Eds.), Handbook of public economics (Vol. 5, pp. 329-390). Elsevier. https://doi.org/10.1016/B978-0-444-53759-1.00006-6

Spilker, B. C., Ayers, B. C., Outslay, E., Weaver, C. D., Barrick, J. A., Robinson, J. R., & Worsham, R. G. (2019). Taxation of individuals and business entities. McGraw-Hill Education.