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Wise Estate Planning Strategies to Plan Gifts

Last update on: Jun 23 2020
Estate Planning

In last month’s visit we discussed probable changes in the estate tax that mean many people should restore regular giving to their Estate Planning Strategy. This month, we will talk about the details of gift giving plans so you can avoid big estate planning mistakes many people make.

The goal of annual gift giving is to remove assets and their future appreciation from the estate. Estate and gift taxes are imposed on the value of assets. The lower the value of assets in the estate, the lower will be the taxes on the family. When people remember that, they are less likely to make gift giving mistakes. Here are some guidelines for your estate plan giving.

Give early. Most estate planning gifts are made near the end of the year. That is holiday gift giving time, and it also is when people hurry to wrap up by Dec. 31 the things they meant to do all year. There are good reasons to make the gifts in January instead of December.

If you give property instead of cash, appreciation during the year reduces the amount of property you give tax free or increases taxes on the gift. For example, if you can give 100 shares of a mutual fund tax free in January and the fund increases 10% by December, you can give only 90 shares tax free at the end of the year. Estate and gift taxes are minimized when appreciating assets are given sooner rather than later.

If cash or income-producing property is given, a gift early in the year ensures that income for the year is not on your tax return. Unless you need the income (in which case you probably should not be giving the property), give early in the year and let another family member who probably is in a lower tax bracket pay the income taxes.
Of course, a gift early in the year ensures that the gift actually is made and the property is out of your estate.

Give an extra amount. The tax law provides an annual gift tax exemption. This year it is $12,000, and it is indexed for inflation. A married couple can jointly give $24,000. The exempt amount can be given to any number of people each year, and there is no relationship requirement. Exempt gifts can be made to any one.

There also is a lifetime gift tax exclusion of $1 million. Annual gifts above the exempt amount count against this exemption. To the extent the $1 million lifetime exemption is used, the estate tax exemption is reduced. When lifetime non-exempt gifts exceed $1 million, gift taxes are imposed.

Most people give the exempt amount and nothing more each year. If you can afford to live without the assets, however, consider giving more than the annual exempt amount.

If assets are appreciating, removing them from the estate now also removes the future appreciation. When an estate is unlikely to exceed the estate tax exempt amount, this is not important. But if an estate is likely to be taxable, the owner should consider removing appreciating assets early. Otherwise, at current tax rates only forty-five cents of each dollar of additional appreciation in the estate goes to the heirs. If Congress does not change the law, after 2010 the IRS will receive over half of those excess dollars. (See last month’s issue for details of how the law will change.) For large estates, it makes sense to give amounts exceeding the $1 million lifetime exemption now. Pay taxes on the current amount and ensure there are no gift or estate taxes on the appreciation.

Give appreciating gifts. One can give cash and personal property or appreciating property. To maximize estate planning tax savings, give the appreciating property. Giving appreciating property removes not only the current value of the asset from the estate but also the future appreciation.

Hold property with big gains. When property is inherited, the beneficiary increases the tax basis to its current fair market value in most cases. When property is received as a gift, the beneficiary usually takes the same tax basis the giver had. That means all the appreciation that occurred during the giver’s ownership still is subject to capital gains when the beneficiary sells the property. But when someone inherits property, it can be sold immediately with no capital gains taxes being incurred.

Capital gains taxes are lower than gift and estate taxes. So, a balancing act might be required. If there is a choice of appreciating assets to give, it is better to give those with little or no imbedded capital gains. But if the choice is between assets with imbedded capital gains and giving cash or non-appreciating assets, it might be better to have the beneficiary incur capital gains when selling the property than to incur higher estate taxes down the road.

Keep loss property. There is no good reason to give business or investment property that has depreciated. The beneficiary’s tax basis from such a gift is the lower of the current value and the donor’s basis, which means it is the current value. No one gets to deduct the loss that has occurred. It makes more sense to sell the losing property, deduct the loss on your tax return, and give cash to the beneficiary.

Don’t forget unlimited tax-free gifts. There are two types of estate planning gifts that can be made unlimited amounts and avoid gift taxes: education and medical gifts. We reviewed the details of how to make those gifts tax free last month. The key point is that payment of the gifts must be made directly to the education or medical provider, not to the beneficiary.

Review the Kiddie Tax. When gifts are made to minors, keep the latest version of the Kiddie Tax in mind. We reviewed it and appropriate strategies in our July 2007 visit.

Maximize trust gifts. Gifts don’t have to be made directly to individuals. Gifts to a trust qualify for the annual exemption if the trust has a Crummey clause. To qualify for the exemption, a gift must be direct and immediate. A gift to a trust qualifies only if the beneficiary has the right to withdraw the gift. The right to withdraw can expire after a period of time, such as 30 days. If the gift is not withdrawn in the time period, it stays in the trust and is subject to its limits. Of course, if a beneficiary does withdraw a gift from a trust, there is no obligation to make future gifts. A beneficiary must be aware of the right to withdraw the gift.

Add contingent beneficiaries. The annual gift tax exempt amount can be contributed to the trust for each beneficiary. If there are three beneficiaries, $36,000 can be contributed tax free if the trust has a Crummey clause. Contingent beneficiaries also increase the tax free gifts in most trusts. For example, your children can be the main beneficiaries of the trust and the grandchildren contingent beneficiaries. Meet with an estate planning advisor to discuss how the trust must be written for contingent beneficiaries to increase the annual exempt amount. November 2007.

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