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Wealth Conservation: Reducing Wealth and State Tax Through Annual Gifts to Children


Pedro Bourbone is the founder and owner of a highly successful small business and, over the past several years, has accumulated a significant amount of personal wealth. His portfolio of stocks and bonds is worth nearly $5,000,000 and generates income from dividends and interest of nearly $250,000 per year. With his salary from the business and his dividends and interest, Pedro has taxable income of approximately $600,000 per year and is clearly in the top individual marginal tax bracket. Pedro is married and has three children, ages 16, 14, and 12. Neither his wife nor his children are employed and have no income. Pedro has come to you as his CPA to discuss ways to reduce his individual tax liability as well as to discuss the potential estate tax upon his death. You mention the possibility of making gifts each year to his children. Explain how annual gifts to his children will reduce both his income during lifetime and his estate tax at death.

Solution Preview

Pay attention to the fact that the earning assets are consistently being drawn down.

Gift Taxes and Estate Taxes

The annual gift tax exclusion with gift-splitting is $22,000. Pedro and his wife together can give to each child up to $22,000. Employing the strategy enables Pedro to decrease his assets earning money by $66,000 per year and to shift some of the income he is earning on his assets to his minor children. The top tax bracket is 35%. The first year that he and his ...

Solution Summary

This solution consists of a word problem and the professional response to the inquiry. The subject matter is how to systematically use the Gift and Estate Tax Laws appropriately to reduce the estate tax at death.