E. Determine whether Charles should gift or bequeath the assets to the niece and determine the financial advantage of the strategy chosen. [Note: No generation-skipping transfer tax would apply in this case.]
Answer:" An immediate gift to the niece of $2 million would trigger a gift tax of $1 million due immediately from the donor. Charles would pay this tax in full using the remaining funds in the account."
Why it is 2 million, shouldn’t be 3 million? I didn’t find the question mentions anything of it.
If you have 3 million you can’t give your niece all 3 million when you have to pay 50% gift tax.
It’s a mental trick question.
Which is better, to leave 3 mill at death or gift the full 3 million now (which would be taxed 50% leaving 1.5 million to the recipient), or alternatively is there a way to play around with the numbers to leave more to the recipient.
Here in the fact pattern there is an alternative way. So that the recipient receives 2 million not 1.5 million.
They are saying gift 2 million now, so the recipient gets the 2 million. The person giving the gift has to pay 50% tax on the gift action. In this case 1 million dollars (50% of 2 million). So they played with the facts to get a result where 2 million was received by the person, not 1.5 million. They are asking for some mental gymnastics in my opinion, how to manipulate 3 million into the optimal solution given the tax regime.
Is this question getting at that whole concept of there being a tax benefit in relation to gifting assets when the donor is responsible for paying the gift tax (as opposed to when recipient pays)?
That’s where I went with my response. The answer doesn’t refer to this specifically so I was wondering if my thought process was correct or not