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With
the holidays just around the corner, you might be feeling generous
— and for estate planning purposes, now might be a good time
to turn your generosity into tax savings. Holiday gifts to family
members and loved ones can reduce the size of your taxable estate,
within generous limits, without triggering any estate or gift tax.
Let’s
start off with this basic premise:
The assets in your estate can be sheltered from federal estate tax by
the estate tax exemption.
Effectively, the exemption covers assets of up to $2 million owned by a
decedent. This figure is scheduled to increase to $3.5 million in 2009
before the federal estate tax is repealed in 2010. However, the estate
tax will be revived in 2011 unless Congress amends the law between now
and then.
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Caution:
Don’t Overdo It
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The
IRS may step in if it thinks an arrangement is a bogus attempt to shift
more money out of your taxable estate than allowed. And there has to be
an actual gift where you don't maintain control over the assets.
For example, in one case, the Tax Court denied the exclusion
when gifts of family business
stock were transferred to the spouses of the donor’s sons
with the understanding that the stock would immediately be re-gifted to
the sons.
According to the court: “The evidence shows the
daughters-in-law were merely intermediate recipients, and that decedent
intended to transfer the stock to her lineal descendants who were
committed to continuing the operation” of the family
business.(Estate of Marie A.
Bies, TC Memo 2000-338) |
In the
meantime, you’re also entitled to a $1 million gift tax
exemption for lifetime gifts. However, using the gift tax exemption
erodes your effective estate tax shelter. This could saddle your family
with a hefty estate tax bill in the future.
Here's
Where the Annual Gift Tax Exclusion
Comes In
Under a
special provision in the tax code, you can give each recipient of your
generosity up to $12,000 a year in cash or other assets without paying
any gift tax. (The annual exclusion was increased from
$11,000 per recipient in 2005.) This is above and
beyond the amounts sheltered by the estate and gift tax
exemptions. In addition, the exclusion is doubled to $24,000
per year for joint gifts made by a married couple to a recipient.You
don’t have to file a gift tax return to benefit from the
annual gift tax exclusion, although your spouse must provide consent on
a return for joint gifts. The
benefit: Suppose you want to
provide a boost to your grandchild’s future college costs.
You can give the grandchild $12,000 this year without any gift
tax consequences. This strategy can be repeated year after year. If you
give gifts of the maximum $12,000 to, say, five different grandchildren
for five years in a row, you will have reduced your estate by $300,000
— without filing any paperwork with the IRS.
Ways
to Give More
Be
aware that gifts made directly to a financial institution to pay for
tuition or to a health care provider to pay for medical expenses on
behalf of someone else do not count towards the exclusion. As an
example, you can pay $20,000 to your grandson's college for his tuition
this year, plus still give him up to $12,000.
In addition, there’s a special way to use the annual
exclusion for gifts to fund section 529 college savings plans for your
children or grandchildren. These tax-saving plans help parents save for
higher education. Under tax law, you can contribute up to $60,000 to a
beneficiary’s 529 plan in one year ($120,000 if you
contribute with your spouse). But in order to accomplish this, there
are a number of rules you must follow so consult with your tax adviser
if you are interested to ensure compliance.
Finally,
remember that the gift tax exclusion applies on an annual basis.
Therefore, you can give a family member up to $12,000 in late December
and give the same person another $12,000 in early January.
This technique may be used for several other recipients. By
“doubling up” in this fashion, you can reduce your
estate by a sizeable amount in just a few weeks.
As you can see, gifts made during your lifetime can make a great deal
of tax-sense if your estate is large enough, compared with letting the
assets be eaten away by estate tax. Still, not everyone is comfortable
with the idea of giving away assets. You might be worried that you'll
need them someday or you may feel your children aren't ready to manage
the assets. Both are legitimate concerns. You may want to maintain your
lifestyle years from now and not watch your children squander your
savings.
Planned gift giving is not a do-it-yourself project. You worked hard to
accumulate assets and you want to make sure they're managed properly.
Call Ronald J. Cappuccio,
J.D., LL.M.(Tax) at (856)
665-2121 to help
achieve the greatest savings while maximizing your wealth.
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