As part of their estate, Tony and Eleanor Hall currently own a $2.5 million portfolio of equities and bonds that has an average annual pretax return of 10 percent. The Halls’ after-tax return on the portfolio is 7 percent (the tax rate is 30 percent). Due to the rapid deterioration in their health, the Halls are considering transferring the $2.5 million portfolio to their eldest grandchild, Joe, during the current financial year. By transferring their investment portfolio directly to their grandson, the Halls are attempting to reduce the transfer taxation effect of their inheritance. Although $1.5 million can be transferred tax free, local jurisdiction requires that the remaining $1 million transfer be subject to a 30 percent tax rate, which is Joe’s responsibility as donee. The Halls have consulted with their financial planner as they are uncertain whether the 30 percent tax rate would also apply if their gift to their grandson is delayed and transferred as a bequest five years from today. Their grandson currently pays a marginal tax rate of 25 percent.
- Given that the $1 million transfer is subject to 30 percent tax whether it takes place today or is delayed and transferred as a bequest in five years, is there any advantage in delaying payment of the gift by five years?
If I calculate the relative value of
RVTaxableGift=FVGiftFVBequest=1+0.10(1−0.25)1+0.10(1−0.30)= 1.0047 < 1.02 which is less when he doing transfer after 5 years.
Answers say There is no advantage in delaying payment of the gift.
Please help me to understand the gap in my understanding