If you are like most people, you do not prefer to think about estate planning, but it is an important part of ensuring the financial security of your loved ones. One of the most common tools used in estate planning is a program of giving gifts. Although the Economic Growth and Tax Relief Reconciliation Act of 2001 continues to change a substantial part of the gift and estate tax laws through 2010, lifetime gifts can still be useful. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth. This principle applies whether or not Congress adheres to its plan of gradually repealing the estate tax while modifying the gift tax in the interim. Congress could make the changes permanent, but has chosen to defer this with the adoption of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted on December 17, 2010.
Gifts can also serve a function in your income tax planning by shifting income-producing or appreciated property to others who are in a lower tax bracket. The maximum estate tax rates were phased down from 55% before 2002 to 45% in 2009. The estate tax rate for 2010 is zero. Additionally, with the income tax rates for individuals being reduced by about three or four percentage points (depending on your tax bracket), gift giving can still yield significant benefits.
While large gifts are subject to gift taxation, you may give away up to $13,000, per recipient, per year, free of gift tax. This is an inflation-indexed amount, previously $10,000 before 2002. These gifts also do not reduce the amount that you can pass free of gift tax—$1 million lifetime exclusion or $2 million if gifts are “split” with a spouse.
There is a great deal of flexibility in the types of property that can be transferred. Gifts that qualify for the $13,000 annual exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy, as long as the recipient receives the right to possess or use the property. The gift may be in a trust if the terms of the trust give the recipient the immediate right to the property or income from the property. If the recipient is a minor, the gift may be made to a custodian or legally appointed guardian of the minor’s property. However, if the recipient is a child under 18, income from the property may be taxed at the parent’s marginal rate. This also applies if the tax year begins after May 25, 2007 and the child is under 19 years of age or the child is under 24 years of age and is a full-time student whose earned income does not exceed half of his or her own support.
You may give up to $26,000, per recipient, per year if you are married and your spouse consents to “split” your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away free of gift tax. To take advantage of “gift splitting,” both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. A short form gift tax return is available for these returns.
One important thing to remember when making a gift is that the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using the amount paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another through your estate, the recipient can use the value of the property at that time in measuring any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.
Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You may pay an unlimited amount for these expenses, free of gift tax, as long as the payments are made directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses must not be reimbursed by insurance to either you or to the beneficiary.
If used properly, a gifting program can benefit everyone involved. For further information about tax planning opportunities, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
