Secrets Of Effective Gift-Giving

To paraphrase Archie Bunker from a holiday episode of “All In The Family,” the gift-giving season is at our throats again. Gifts are a great estate planning tool, because they get property out of your estate and to your heirs, and the gifts can avoid taxes. Let’s look at ways to ensure these gifts generate the maximum benefit for your estate plan.

• You know that annual gifts up to $10,000 to each donee avoid gifts taxes. But you might benefit by giving more. To determine how much you safely can give without endangering your standard of living, prepare an estimate of income and expenses for your retirement years. You might want a financial planner to help.
• Give early in the year. That way, income earned by the gift is off your tax return. If you don’t need the income, get it off your tax return and save income taxes along with the estate taxes. When the property is given to someone in a lower tax bracket, the family overall pays lower income taxes. Giving early also ensures that the property is out of your estate, in case anything happens that prevents you from making the gifts later in the year. Giving early in the year also might allow you go give more. Suppose you are giving mutual fund shares with a value of $100 per share in January. You can give 100 shares. But if the shares appreciate 10% during the year, you can give only 90 shares in December. If you haven’t made gifts already, do so by Dec. 31. But also plan to make your gifts for next year in January.
• Give more than $10,000 per person tax free each year.
  Education gifts of an unlimited amount are tax free if they pay for direct tuition costs and not for other costs, such as books, supplies, board, lodging, or other fees. Payments must be made directly to the education institution. Medical expenses also can generate unlimited tax free gifts. The payments can be for any expense that would qualify as a deductible itemized medical expense. Again, the payments must be made directly to the medical care provider.
• Use a Crummey trust to give property tax-free when you don’t want to give someone property directly. This allows beneficiaries to withdraw their portion of the annual gift if they do so within 30 days of receiving notice of the gift. That qualifies the gifts for the $10,000 annual exclusion. Of course, you won’t put more money in the trust if anyone withdraws the gift. After the 30 days, they no longer can get the property except under the terms of the trust.
• You also can name contingent trust beneficiaries. Name your children the primary beneficiaries, and your grandchildren as the contingent beneficiaries. Say you have three children and three grandchildren. One spouse can contribute $60,000 annually to the trust free of gift taxes. Yet, you can write the trust so that the children get the primary benefit from the income and property.
• If you can afford it, give more than the tax-free amount. That saves more tax dollars in the long run. Here’s how it works.
  You have a lifetime estate and gift tax exemption. It currently is $675,000 and will rise to $1,000,000 by 2006. Suppose you have $100,000 of assets you don’t need. If they appreciate 10% annually for 10 years, they would be worth about $260,000, using a lot of your lifetime exemption. If you are confident you won’t need the assets, give them now and get them out of your estate at the lower value. It uses only $100,000 of your lifetime exemption.
• Give property that is likely to appreciate. As you’ve seen, you get more wealth out of your estate tax free if you give property before it appreciates.
• Don’t give depressed property. When property has declined in value and you make a gift, the recipient’s tax basis is the lower of your basis and its fair market value. That means no one gets to deduct the loss. It is better for you to sell the property, deduct the loss on your tax return, and give away the cash from the sale.
• Hold some big winners for your estate. You might have assets you purchased years ago that have appreciated significantly. Any sale results in significant capital gains taxes. If you give it, the recipient takes the same tax basis that you have and eventually will pay big taxes. But if the property passes through your estate, the tax basis is increased to the fair market value. No one will pay capital gains taxes on the appreciation during your lifetime. It is a good idea to hold such assets in your estate and work to reduce the estate taxes.This strategy requires a balancing act. It the asset is very valuable and the bulk of your estate, you should give away some of it to reduce the size of your estate. But if you have different, highly appreciated assets, it makes sense to give away those with the highest tax basis and hold those with the lowest tax basis.
• Remember the kiddie tax. One of the objectives of gift giving is to move income-producing property from your higher tax bracket to a family member in a lower tax bracket. If investment income is earned by a child under age 14, the first $700 is tax free, the next $700 is taxed at the 15% rate.

Any investment income above $1,400 (indexed for inflation) is taxed at the parent’s highest tax rate. Once the child turns 14, the Kiddie Tax doesn’t apply. That means if you are giving property that generates a lot of income or capital gains, be careful about giving too much to a child or grandchild under age 14.