Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How to Multiply the Benefits of Gifts

A key estate planing tool for almost every family is more valuable as of Jan. 1, 2009. The annual gift tax exclusion is increased to $13,000, up from $12,000.

Each person can make gifts of up to $13,000 annually to any other person without incurring gift taxes or counting against the lifetime annual gift credit that excludes $1 million of gifts from taxes. Married couples can jointly make nontaxable gifts of $26,000 to any person. The exclusion can be used to make gifts to as many people as you desire, and can afford. The exclusion applies to gifts of both money and property.

Tax-free gifts are the easiest way to reduce estate and gift taxes. Make a gift and the value of the property is out of your estate, along with its future appreciation and any income it pays. Longtime readers know I encourage a planned giving program to reduce taxes and transfer property to the objects of your affection. If property is likely to appreciate, giving now allows you to give more property because the future appreciation is not taxed. With asset prices down, giving now is especially important and rewarding.

Be sure not to give away more assets than you can afford to do without. To qualify for the annual exclusion, a gift must be of a “present interest” and be a transfer of full legal rights. If you retain rights to the property or can get it back, it is not a gift. The property will be included in your estate.

If you do not want someone to have direct control of property (they might be too young or irresponsible), you can give through a trust if it has a Crummey power. This gives the person the right to withdraw the property from the trust within a certain time frame. If they do not withdraw it, the property stays in the trust and qualifies for the annual exclusion.

The benefits of the annual gift tax exclusion can be enhanced by shrewdly planning how gifts are made.

Give early in the year. Most people make their estate planning gifts at the end of the year. But giving early in the year ensures the gifts are made. Early gifts also mean the gift is valued before any appreciation for the year occurs. With gifts of property, such as shares of stock or a mutual fund, early giving can allow you to give more tax free. Income produced by the gift during the year also is off your tax return.

Give property that is likely to appreciate. Remember estate and gift taxes are based on the value of the estate. That means the best gifts are those likely to appreciate and not be sold by the recipients. The donees benefit from all the future appreciation without its being reduced by estate or gift taxes. If you wait to transfer the property in your will, the appreciation will be included in your estate, potentially triggering estate taxes. Give property with the most potential to appreciate and retain property with less appreciation potential.

Keep highly appreciated property. When you give property, the recipient takes the same tax basis you had. When property is received through a will, the recipient’s basis is the current fair market value. If you had a low basis in property you give, the recipient will owe capital gains taxes on that appreciation whenever it is sold. If you have a choice, it is better to retain highly appreciated property in your estate and give property with low appreciation but potential. That way, no one pays capital gains taxes on the appreciation.

Let lower-bracket taxpayers take gains. If you must give property that has appreciated, try to give it to someone in a lower capital gains tax bracket. If the recipient is in the same capital gains bracket as you and the recipient will sell to use the cash, consider selling the asset yourself and giving the cash. Otherwise, part of the annual gift tax exclusion would be used for value that is earmarked for taxes. You will be transferring less after-tax value to the loved one.

Don’t give loss property. The basis rules are different when the property has a paper loss. The recipient takes a basis in the property of the lower of your basis and current market value. No one would benefit from deducting the loss incurred while you held the property.

Instead, sell the property, deduct the loss on your tax return, and give the after-tax proceeds. Or hold the loss property and give other property.

Make unlimited tax-free gifts. Two types of gifts avoid taxes regardless of the amount given, if you follow the rules. Education gifts are tax free in unlimited amounts if they pay for direct tuition costs and not for items such as books, supplies, board, lodging, or other fees. The gifts must be made directly to the education provider and can be made on behalf of any individual, regardless of his or her relationship to you.

Medical gifts avoid taxes when payments are made directly to a medical care provider and are for items that would qualify as deductible itemized medical expenses on Schedule A of the income tax return. That doesn’t mean you take the deduction or have to qualify to deduct the expenses. It means the expenses must be the type that would qualify.

The unlimited tax-free gifts do not apply against the annual tax-free exclusion for gifts to those individuals. So, you also can make up to $13,000 or other gifts to those people.

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