Is it worthwhile and appropriate for you to plan year-end
significant gifts now to reduce transfer taxes that otherwise
would likely be payable in estate taxes in future taxes?
Because of future policy uncertainties related to a possible
gift transfer tax lifetime exemption decrease and tax rate
increase for gifts in excess of the exclusion amount (for 2012:
13,000), it may be beneficial to evaluate the timing of your
gift with your advisor.
In conjunction with the guidance of a qualified estate
planning attorney and advice of a CERTIFIED FINANCIAL PLANNER
professional from the Financial Planning Association
, you should assess your financial condition to determine if
making significant gifts at minimal tax cost for the remainder
of this year would be beneficial for you and your family.
Prudently evaluate your donative intent and future cash flow
needs prior to structuring and passing on a large gift.
Understanding that these opportunities may be most suitable
for substantial estates (i.e. larger than the current indexed
$5.12 million per-individual estate tax exemption), you can
peruse and utilize the following year-end gift tax saving tips
to enhance your peace of mind and future financial security of
your loved ones:
- Recognize that you are presently permitted to annually
give up to $13,000 of assets (i.e. cash or non-cash items)
per person without incurring any gift tax or
generation-skipping transfer (GST) tax consequences. Note
there is no limit on the number of gifts if they are made to
different individuals or trusts, and your recipients do not
have to be relatives. If your spouse joins you in electing to
apply his or her annual exclusion amount to a transferred
asset by gift-splitting, you can pass on double the exempt
amount ($26,000 for 2012) per donee. To qualify for
gift-splitting, be wary that both you and your spouse must be
U.S. citizens or residents at the time of the gift.
- How can you devise year-end gifts when you are a U.S.
citizen and your spouse or family member is not a U.S.
citizen? Keep in perspective that partners who are both U.S.
citizens can give unlimited amounts of money to each other
without being subject to gift taxes. In contrast, you can
gift only up to the 2012 annual limit of $139,000 to a
non-U.S. citizen spouse. Seek the guidance of an estate
lawyer and credentialed financial professional with expertise
in international planning to assist you in strategizing your
gifts to non-U.S. citizens and residents.
- Pare down possible estate taxes and handle increasing
private school and university education costs by directly
prepaying an unlimited amount of your family members' tuition
expenses to the qualified institution. By making this direct,
gift-free and GST-free tax transfer of money and out of your
estate, you still leave the annual $13,000 additional
gift-tax exclusion open to make gifts (i.e. room and board,
books, and transportation) to your children or grandchildren.
Similarly, you preserve your lifetime gift-tax exemption and
incur no gift tax when directly paying your family members'
health care bills to a medical services provider.
- Be cognizant that gifts made to 529 education savings
accounts for the benefit of others, such as kids and
grandchildren, can provide you with a favorable tax
situation, as long as you own the account.
Further, these contributions to your child's or grandchild's
529 account will be out of your taxable estate. You are still
allowed to take back all or part of the original gift amount
if needed (value returns to your estate if you withdraw this
money). Think about front-loading a 529 plan by funding up to
five years' worth of payments at once, or up to $65,000 in
2012. Elect to spread this lump-sum contribution over five
years for gift tax purposes by filing IRS Form 709, the
federal gift tax return form.
- Determine if your income-producing assets not needed for
your retirement are viable annual exclusion gifts to family
members in lower income tax brackets. Subject to you living
three years after making a taxable gift, know that this
property will be out of your estate with the future income
taxable to the new owner. Also, you can benefit from the
favorable 35 percent gift tax rate by transferring
appreciated assets that will eventually be sold at a gain to
a family member who pays a lower capital gains tax rate. In
the event you gift property to a custodial account for your
minor's benefit, verify what types of property can be
transferred under applicable state law.
- With proper legal and tax diligence, you can decide to
take advantage of present low interest rates by creating a
Grantor-Retained Annuity Trust (GRAT), an irrevocable right
to which you transfer a taxable gift of remainder interest
while receiving a fixed amount payable annually for the term
of the trust. Remember that a GRAT is an optimal gifting and
estate planning technique if the transferred significant
assets are expected to outperform the IRS's assumed rate over
the duration of your retained interest in the property.
Should you have philanthropic desires but no need for income,
you can apply the same approach to establish a Charitable
Lead Annuity Trust and be entitled to an immediate gift-tax
charitable deduction for an annuity to a preferred charity
over a period of years.
- Seek the counsel of an experienced estate planning
attorney to structure outright annual exclusion gifts of
closely-held business interests or other assets to future
generations. With thorough planning and ongoing respect for
the business structures that are employed, you can
potentially reduce your gift and estate taxes over the
long-term. Carefully consider using $13,000 gifts to forgive
the interest or principal on loans to family members, or to
monetarily assist them with a mortgage payment.
Will your year-end gifting positively impact or negatively
affect you? Remember to set expectations and evaluate the
consequences of every gift. Always double check with the
recipient regarding gifting illiquid assets - especially if it
is a family asset.
FPA member Elaine King , CFP®, CDFATM, is Chairman of
FPA of Miami-Dade and Author of Family & Money Matters,
La Familia y El Dinero Hecho Facil. FPA member Philip
Herzberg, CFP®, AEP®, MSF, is President-Elect of FPA of
Miami-Dade and Director of Media Relations & Public
Awareness for FPA of Florida/Miami-Dade. They serve on the
Estate Planning Council of Greater Miami Board of
Sanders, Laura, The Wall Street Journal, "Tax Report: The
Gift That Keeps Giving," August 17, 2012.