John is 50 years old and he is working on to his estate planning strategy to...

 

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John is 50 years old and he is working on to his estate planning strategy to transfer wealth to his cousin, Mary. Annual exclusions allow John to make tax-free gifts of £20,000 per year, and gratuitous transfer tax liabilities are the responsibility of the recipient. John notes that the relevant tax rate for bequests from the estate is likely to be 65 percent. He is aware, however, that gifts (in excess of the £20,000 exception mentioned above) made prior to age 70 enjoy 50 percent relief of the normal estate tax of 65 percent, and for an effective tax rate of 35 percent. In addition, Mary enjoys a low tax rate of 25 percent on investment income because she has relatively low income. John, on the other hand, is subject to a 50 percent tax rate on investment income and he is considering gifting assets that are expected to earn a 6.5 percent real return annually over the next 25 years. a. Calculate how much of his estate will John have transferred on an inflation-adjusted basis in 25 years without paying estate tax. [4 marks] b. Calculate the relative value of the tax-free gift compared to the value of a bequest in 25 years. [8 marks] c. Assume that John wishes to make an additional gift that would be subject to gift tax. What would be the relative after-tax value of that taxable gift compared to a bequest 25 years later. John is 50 years old and he is working on to his estate planning strategy to transfer wealth to his cousin, Mary. Annual exclusions allow John to make tax-free gifts of £20,000 per year, and gratuitous transfer tax liabilities are the responsibility of the recipient. John notes that the relevant tax rate for bequests from the estate is likely to be 65 percent. He is aware, however, that gifts (in excess of the £20,000 exception mentioned above) made prior to age 70 enjoy 50 percent relief of the normal estate tax of 65 percent, and for an effective tax rate of 35 percent. In addition, Mary enjoys a low tax rate of 25 percent on investment income because she has relatively low income. John, on the other hand, is subject to a 50 percent tax rate on investment income and he is considering gifting assets that are expected to earn a 6.5 percent real return annually over the next 25 years. a. Calculate how much of his estate will John have transferred on an inflation-adjusted basis in 25 years without paying estate tax. [4 marks] b. Calculate the relative value of the tax-free gift compared to the value of a bequest in 25 years. [8 marks] c. Assume that John wishes to make an additional gift that would be subject to gift tax. What would be the relative after-tax value of that taxable gift compared to a bequest 25 years later.

Answer rating: 100% (QA)

a Assuming that John does not gift any more than the annual exclusion amount of 20000 per year 25 ye... View the full answer