Making Smarter Estate Planning Gifts to Family Members

Giving gifts isn’t as easy as one might think. It’s not easy, that is, if you want to maximize the value and impact of your gifts. Watching every gift is the tax man, looking to take a piece of it. Even if your estate isn’t likely to be taxable, you should be looking for ways to minimize income and capital gains taxes through Estate Planning now and in the future. Plus, you never know what the estate tax situation will be in the future. You don’t want to waste today federal tax breaks you might need in the future.

First, here’s a review of the estate planning fundamentals.

The estate tax exemption is set at $5 million per person, indexed for inflation. For 2014 the exemption is $5.34 million. Married couples can use the portability provisions to jointly exempt twice that amount. There’s also a lifetime gift tax exemption of the same amount as the estate tax exemption. If you make more than $5.34 million of taxable gifts during your lifetime, gifts above that amount are taxable. Plus, any use of the lifetime gift tax exemption reduces the estate tax exemption. So, you have a combined lifetime estate and gift tax exemption of $5.34 million in 2014. It’s called the unified exemption in the tax code. You can give tax-free now or later.

There are ways to give money and property without using up the lifetime estate and gift tax exemption.

Many people make use of the annual gift tax exemption. In 2014 you can give up to $14,000 of money or property to each person you want without it being taxable or counting against your lifetime estate and gift tax exemption. (The $14,000 is indexed for inflation.) A married couple can jointly give each person up to $28,000 gift tax free.

Suppose Max and Rosie Profits have three children. Max can give each child up to $14,000 in 2014, or a total of $42,000. The gifts won’t use his lifetime gift tax exemption or reduce his estate tax exemption. Or Max and Rosie can jointly give $28,000 per child, or a total of $84,000. If the Profits have grandchildren, they can give each grandchild the same $28,000 jointly without estate or gift tax consequences.

The annual gift tax exemption isn’t restricted to gifts to family members. The same exemption is available for gifts to friends, acquaintances, and even strangers. And you can give to as many people as you want during the year. There’s no limit to the number of people, only on the tax exempt amount you can give to each person.

The gifts can be of money or property. The value of a gift of property is its fair market value on the date of the gift. The $14,000 limit applies to the total of all gifts to that person during the year, not to each individual gift.

Gifts to a trust qualify for the annual gift tax exclusion when they are gifts of present interests. This generally means the trust must have a Crummey power that entitles the beneficiary to take the money out of the trust within a time frame after the gift was made. After the time passes, the property stays in the trust subject to its rules.

There also is an unlimited gift tax exclusion that doesn’t reduce the lifetime exclusions or the annual gift tax exclusion. The unlimited exclusion is for gifts of medical and education expenses. Payments must be made directly to the provider of the services to qualify for the unlimited exemption. If you give money to the person receiving the services, then that gift applies against the annual exclusion and lifetime exemption.

Only qualified medical and education expenses qualify. Qualified education expenses are tuition only for any level of schooling. Expenses that aren’t direct tuition costs aren’t qualified, including room, board, books, fees. Qualified medical expenses are any that meet the definition of deductible medical expenses. You can find more details in free IRS Publications 709 and 950, available free at www.irs.gov or by calling 800-TAX-FORM.

There are strategies that will help you maximize the benefits of these rules or avoid some pitfalls. They reduce income and capital gains taxes, even when the estate and gift tax aren’t likely to be factors.

Bob Carlson, the #1 retirement planning expert, shares with his readers, his insights on

Estate Planning Strategy #1

Don’t give loss property. When you give property, the beneficiary has to establish a tax basis in it. When the property eventually is sold, the capital gain or loss will be the amount realized on the sale minus the basis.

When you give property in which you have a paper loss, the beneficiary’s basis will be the lower of your basis and the current market value. That means the estate planning beneficiary will reduce the basis to current market value, and the loss incurred while you owned the property won’t be deductible by anyone.

It’s better if you sell the loss property, and deduct the loss on your tax return. You can give the after-sale proceeds or other property to loved ones.

Estate Planning Strategy #2

Consider giving appreciating property. When a beneficiary is in a lower-tax bracket than yours, it makes a lot of sense to give property you expect to appreciate. When the property eventually is sold, the taxable gains are off your tax return. They’re on your loved one’s tax return, and possibly taxed at a lower rate.

Giving property you expect to appreciate also removes the future appreciation from your estate. Giving the property before the appreciation essentially allows you to give more tax free, because the future appreciation doesn’t apply against your annual gift tax exclusion or lifetime estate and gift tax exclusions.

Estate Planning Strategy #3

Consider holding highly appreciated property. You could give property that’s already appreciated a lot to someone in the 0% or even 10% capital gains tax bracket. They’ll pay a fraction of the capital gains taxes that you would. But be sure that selling the property wouldn’t put them in a higher bracket.

Consider instead holding the property and having it pass through your estate. When appreciated property is received as a gift, the beneficiary takes the same tax basis the previous owner had. That means all the appreciation is taxed whenever the beneficiary sells it.

When property is inherited through an estate, however, the beneficiary’s tax basis is its fair market value as of the date of the owner’s death. That means if you hold highly appreciated property for life, the appreciation during your lifetime never is subject to capital gains taxes.

Estate Planning Strategy #4

Give income-producing assets. With the estate tax less of a factor for most people, gift giving should focus more on reducing family income taxes. You might be in a high income-tax bracket and have assets that are generating taxable income in excess of your needs.

In that case, it makes sense to give those assets instead of cash. The income is shifted to a lower tax bracket, keeping more after-tax wealth in your family. Also, a gift of income-producing property could induce the beneficiaries to hold the property. They might recognize the benefit of having an asset generate regular income.

When giving to youngsters, keep the kiddie tax in mind. When a child is under age 19 (or under 24 if a full-time college student), the child’s investment income is taxed at his or her parents’ highest tax rate when the child’s investment income exceeds $1,900 (indexed for inflation each year). Details about the Kiddie Tax are in IRS Publications 17 and 929 and in the instructions to Form 8615 available free at www.irs.gov or by calling 800-TAX-FORM.

Estate Planning Strategy #5

Plan 2014 and 2015 gifts together. I usually favor making gifts early instead of the end-of-year holiday period that most people favor. Early year gifts ensure the gifts are made and the year’s income and appreciation are out of your estate or off your tax return.

Planning two years together also is advantageous when giving property that has to be appraised. An appraisal costs money. If you give interests in that property in December and again in January, then you probably have to pay only for one appraisal.

RW October 2014.