ACC 456 Week 5 Estate and Gift Taxation Example

A $19.5 Million Estate That Owes No Estate Tax: Gross Estate, Deductions, Prior Taxable Gifts and a Late Husband's Unused Exclusion for a Composite Widow Who Died in 2025

[Student Name]

University of Phoenix

ACC/456: Individual/Estate Taxation

Week 5 Assignment

[Instructor Name]

[Date]

The family and all figures are composites written for a model paper; 2025 amounts and rules come from the sources listed.

A composite widow died in October 2025 at age 84. Her husband had died in 2018, and his executor filed an estate tax return that elected portability, passing his unused exclusion to her. She left her estate to her three children and a gift to the hospital foundation where she had volunteered. Her executor, the oldest son, must file Form 706 because her gross estate exceeds the filing threshold. An estate this large can owe nothing only if every rule in the unified system is applied in order, including one her husband's executor chose seven years earlier. This paper computes the estate tax and explains the planning around it.

The Gross Estate

The gross estate includes all property the decedent owned or had certain interests in at death, at fair market value on the date of death (Internal Revenue Service, 2025a). Her home, a lake house she and her husband built, is valued at $2.4 million by appraisal. Her brokerage accounts hold $9.1 million. Her IRA holds $2.8 million; although it passes to the children by beneficiary designation, it is included. She owned a 40% interest in the family's chain of hardware stores, valued by an independent appraiser at $4.2 million after discounts for lack of control and marketability. She also owned a $1.0 million policy on her own life; because she held the incidents of ownership, the proceeds are included. The gross estate is $19.5 million.

Deductions

Debts, funeral expenses and estimated administration expenses, including legal and appraisal fees, total $350,000. Her will leaves $1.5 million to the hospital foundation, a qualified charity, which is fully deductible. As a widow, she has no marital deduction. The taxable estate is $19.5 million less $1.85 million, or $17.65 million.

Adding Back Lifetime Gifts

The estate and gift taxes are unified, so lifetime taxable gifts are added to the taxable estate to determine the rate and the credit used. In 2019 she gave $1.2 million to a trust for her grandchildren, a taxable gift reported on a gift tax return, with no gift tax paid because her exclusion covered it (Internal Revenue Service, 2025b). Adjusted taxable gifts of $1.2 million bring the tax base to $18.85 million.

The Tentative Tax and the Credit

Under the rate schedule, the tentative tax on $18.85 million is $345,800 plus 40% of the amount over $1 million, or about $7,485,800.

Her applicable exclusion is the 2025 basic exclusion of $13,990,000 plus her husband's unused exclusion. At his death in 2018, his estate used part of his exclusion for bequests to his children, and his executor elected portability for the remaining $6.0 million. Her total exclusion is $19.99 million, and the credit equal to the tax on that amount is about $7,941,800. The credit exceeds the tentative tax, so no estate tax is due.

Without portability, her exclusion would have been $13.99 million, and tax would have been due on about $4.86 million at 40%, roughly $1.94 million. The election her husband's executor made in 2018, which required filing an estate tax return even though his estate owed no tax, saved the family nearly $2 million.

Basis for the Heirs

Because the assets are included in her estate, the children take a basis equal to their value at her death. The brokerage accounts and the hardware business interest have large unrealized gains that will never be taxed as income. The IRA is different: it is income in respect of a decedent, so the children will pay income tax on withdrawals, generally over ten years.

Annual Gifts and Planning

She could have reduced her estate further with annual exclusion gifts, $19,000 per recipient in 2025, to her three children and seven grandchildren, removing up to $190,000 a year without using any exclusion. Payments of tuition directly to schools and medical expenses directly to providers are also excluded without limit. With the exclusion scheduled at $15 million for 2026 and indexed afterward, families of her wealth face less estate tax than in the past, but portability still matters for a surviving spouse whose assets grow.

The Hardware Business Interest

The 40% interest in the family business is the most contested value on the return. The appraiser started from the value of the whole company, then applied discounts because a 40% holder cannot control dividends or a sale and because shares in a private company cannot be sold quickly. Those discounts reduced the value by about 30%. The IRS often examines such discounts, and the executor has kept the appraisal report, the company's financial statements and the shareholder agreement, which restricts transfers to family members. If the business interest had exceeded 35% of the adjusted gross estate, the estate could have elected to pay any tax in installments over as long as fourteen years, a provision designed to keep family businesses from being sold to pay estate tax. Because no tax is due, the election is not needed, but the value still matters: it becomes the children's basis in the shares.

Is the Estate Tax Fair?

Supporters argue that the estate tax limits the concentration of wealth and taxes gains that escape the income tax through the step-up in basis. Critics argue that it taxes savings already taxed and burdens family businesses. Kopczuk and Slemrod (2001) found evidence that estate taxes are associated with lower reported wealth at death, consistent with both reduced accumulation and avoidance. The widow's case shows how the current system, with a high exclusion and portability, confines the tax to very large estates.

Conclusion

The widow's $19.5 million gross estate became a $17.65 million taxable estate after debts, expenses and the charitable bequest, and an $18.85 million tax base after adding her 2019 gift. Her own 2025 exclusion plus her husband's unused $6.0 million exceeded that base, so no estate tax is due. The heirs receive a stepped-up basis on everything except the IRA.

References

Internal Revenue Service. (2025a). Instructions for Form 706: United States estate (and generation-skipping transfer) tax return. https://www.irs.gov/instructions/i706

Internal Revenue Service. (2025b). Instructions for Form 709: United States gift (and generation-skipping transfer) tax return. https://www.irs.gov/instructions/i709

Kopczuk, W., & Slemrod, J. (2001). The impact of the estate tax on wealth accumulation and avoidance behavior. In W. G. Gale, J. R. Hines Jr., & J. Slemrod (Eds.), Rethinking estate and gift taxation (pp. 299-349). Brookings Institution Press.