Reference no: EM132863453

As part of their estate, Tony and Eleanor Hall currently own a RM2.5 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 RM2.5 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 to their inheritance. Although RM1.5 million can be transferred tax free, local jurisdiction requires that the remaining RM1 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 year from today. Their grandson currently pays a marginal tax rate of 25 percent.

-Discuss the effectiveness of the Halls' generation skipping strategy.

-Calculate the relative after - tax value of the Hall's RM1 million gift (above and beyond the RM1.5 million exclusion) to their grandson. Assume the RM1 million transfer is subject to 30 percent tax whether it takes place today or is delayed and transferred as a bequest in five years.

-Given that the RM1 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?