Implications of Future Income and Estate Taxes Essay

The issue of inheritance is one that is faced with significant implications of tax. Since the provisions of tax on estate and gifting in the United States tax history, it became clear that giving out one's inheritance in a transitioning period rather than in one single payment can result in the positive implication of gifting taxes. The main factor that determines the amount of money gifted to a given individual per year is the gift tax exclusion. The United States provides a total gift tax exclusion on a gift given up to $26,000 per year (Alm & Adhikari, 2015). This means that a parent can gift their children the above-mentioned amount per year without incurring any gift tax liability.

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On the specific issue of estate taxes, tax implications can be very expensive for the family of the estate owner that is left behind after they die. After the owner passes away, federal estate tax ought to be paid in a total of 45%-55% after a period of nine months after the death (Huang & DeBot, 2015). Ideally, this is a very expensive affair. However, through time it has been noted that by undertaking a continuous transition of inheritance while one is still alive, the estate tax can be reduced considerably. In view of the expensive nature of estates, it is advisable to undertake different measures to ensure a smooth transition of assets between aren't and the child to whom the inheritance will be given. In such instances, there are ideally three actions to undertake to ensure that the amount of tax liability on either estate or gifts are reduced considerably.

One of the most advisable ways of reducing tax liability on estates is through the reduction of assets throughout the time one is alive. In this instance, Mr Smith's family can opt to undertake a given course of actions that may see the significant reduction in the size of Mr Smith's estate. The most advisable is to gift the assets to the people you want to live the estate to when you die. In gifting these assets, one is highly advised to gift those assets that have a higher appreciation rate that is higher than that of other assets. In view of this, If Mr and Mrs Smith gift some of the assets in the estate to their child, over time the size of the estate will reduce considerably and the most appreciating assets will be owed by the child without incurring any estate or gift tax liability (Reardon, 2017). Another specific advantage of giving away the most appreciating assets to the child factors well with the future appreciation which will also be counted out of your estate.

Another significant way of giving out inheritance to a child without being affected by expensive tax implications is through enrolling for an Irrevocable Life Insurance Trust (ILIT). This means that an individual, for example, both Mr and Mrs Smith can remove the value of their life insurance from their estate by making an ILIT to the owner of the given policies (Huang & DeBot, 2015). Ideally, this will allow the death benefits of the Life insurance to be excluded from your estate on the condition that you live for 3 or more years after making the transfer of the existing policy.

Lastly, one can set up a Qualified Personal Residence Trust (QPRT). A QPRT can enable one to transfer a given asset such as a house to their children under the condition of a given trust fund (Alm & Adhikari, 2015). This means that the house is gifted to the child with the allowance for you to live in the house for a period of 10-15 years. One advantage of this method of reducing tax implications is that the one receiving the assets do not receive them directly or immediately but after 10-15 years. As such, the value of the asset as a gift is significantly reduced thus reducing the amount of taxes to be paid on the given assets they have been transferred to the beneficiary. However, this method of transferring assets can be costly when one dies before the trust term ends (before 10-15 years) (Reardon, 2017). This will substantiate the asset being included in your estate just as it would have been without the existence of a QPRT. Furthermore, if one continues to live in the house even after the trust term ends, ownership is transferred to the beneficiary and as such one would have to pay rent to live in the given house. Therefore, one would be incurring additional costs through paying rent for the period they live in the house whose ownership they had already transferred.

Of the above three recommendations, the most significant one would be the gifting of estate assets to the children in a transitioning period when the parents are still alive. This would have the most significant tax benefits following that the gifting of estate assets will considerably reduce estate taxes to be paid on the death of the parent through a significant reduction in the size of the estate (Reardon, 2017). Given that the United States estate taxes stand at 45% -55%, it becomes prudent to reduce the size of the estate for a considerable period of time before one's death to reduce the size of the estate and thus the estate tax liability on the death of the owner of the estate (Alm & Adhikari, 2015).

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Gifting options provide the best tax benefits by providing a reasonable reduction in the tax liability. By far, the most viable gifting option is that of gifting appreciating assets to the beneficiary. This is a positively directed action towards reducing the estate tax paid once the owner of the estate dies. As such, Mr Mrs Smith can opt to give Mary the appreciating assets of the estate annually to reduce the size of the estate over time (Repetti, 2016). The asset's appreciation will be counted out of the estate and they will receive no tax liability due to gift tax exemptions.

On the issue of including Mary on the corporate payroll, there are significant tax benefits to be acquired. Tax laws state that any family member employed in a business is allowed a given tax exemption on the total income tax. This comes about due to the fact that Mary's annual income will be included as part of the business expenses and not in the total income. Therefore, the company is due to pay a significantly low amount of tax income due to Mary's tax exemptions (Repetti, 2016). However, Mary has to be working for the given wages or salary for her to qualify for the exemption from the income tax liability.

References

Alm, J., & Adhikari, B. (2015). The Role of Tax Exemptions and Credits (No. 1526).

Huang, C. C., & DeBot, B. (2015). Ten facts you should know about the federal estate tax. Center on Budget and Policy Priorities.

Reardon, D. C. (2017). Estate Tax Planning: Until the Other Shoe Drops. Journal of Financial Service Professionals, 71(5).

Repetti, J. R. (2016). Should We Tax the Gratuitous Transfer of Wealth: An Introduction. BCL Rev., 57, 815.