| |
 |
Which
Gifting Strategy Works Best For You?
|
Recently,
tax law changes have expanded estate planning opportunities.
Notably, you can give more gifts after 2001 than before. From
2001 to 2002, the lifetime and estate tax exemption amount increased
from $675,000 to $1 million. Although the $1 million amount
for gifting is not scheduled to increase, the amount you can
pass at death is set to ultimately rise to $3.5 million in 2009
— the year before the estate tax and the exemption amount
disappear temporarily.
Your planning strategies, thus, resemble last year’s fashions.
Before you shop around, determine which gifting strategy best
fits your needs. Let’s take a closer look at possible strategies.
One Size Fits All?
It’s the thought that counts, right? Don’t be so sure.
You could have the best of intentions, but an improper gifting
strategy could defeat your purpose. When giving gifts, one size
doesn’t always fit all. Remember, only "present interest"
gifts qualify for the annual exclusion amount. To qualify as
a present interest, your gift must vest immediately to your
recipient. Here are a few of the more common gifting methods.
Take a moment and browse.
Writing a Check
Perhaps the easiest way to make a gift is to write a check and
give it to the recipient. But, is this the best way to give?
That answer depends on the amount, other assets available to
the donor, the recipient and other factors. As no definitive
rule exists, evaluate each situation on its own merits.
Establishing a Trust
The problem with giving someone a check is you lose control
of how he or she spends the money. With a trust, you control
how the funds are dispersed. You can even go one step further
by creating an incentive trust. These trusts require beneficiaries
to perform specific tasks, like graduating college or joining
the family business’s board of directors. Although trusts
are more complicated than other gifting strategies, the possible
benefits can be well worth the effort. It is important, though,
that you set up a trust properly. Otherwise, your gift could
lose its present-interest status, disqualifying for the annual
exclusion amount.
Gifting Securities
This strategy involves more than simply writing a check, but
its benefits may outweigh the additional administration. You
may receive additional income tax benefits as well. For instance,
let’s say Grace wants to give a gift to her grandson, Timmy,
in honor of his high school graduation. To make an $11,000 gift,
Grace considers selling a security in which she has a basis
of $0. Grace would incur $2,200 in income tax, assuming she
pays capital gains tax at the 20% rate.
If, instead, she were to give Timmy the security and he later
sells it, Grace would pay no income tax and Timmy would pay
tax according to his bracket. If Timmy has no other income,
the standard deduction and, perhaps, the personal exemption
amount would partially offset the $11,000 gain that he would
have on the sale.
The remaining taxable amount would be taxed at the lower capital
gains rate of 10%. Thus, as a family unit, the tax savings would
be at least $1,175 and potentially much more. Of course, other
considerations may increase or reduce the benefit of taxing
the gain to the grandson. This is just an example of your available
options.
Gifting a Mutual Fund
Instead of gifting stock, you could give a mutual fund. Doing
so before the date of a large dividend distribution can reduce
your income taxes, because the distribution will be taxed to
the recipient. If you gift to a family member with a lower tax
bracket, your family as a whole would be better off than if
you had paid the tax and gifted cash.
Benefiting Generations
If you live in one of the many states that has abolished the
archaic Rule Against Perpetuities, you may be able to create
a trust that potentially benefits many generations to come.
Although the laws governing the trust are complex, the trust’s
concept is relatively basic. While you could create such a trust
during your lifetime, we’ll address doing so at death.
Essentially:
1. At your death, your estate planning
documents create a trust, equal to your lifetime exemption amount,
that is drafted to provide, for instance, that all income is
to be paid to your surviving spouse for life. It is important
to properly allocate your generation-skipping transfer tax exemption
to the trust.
2. At the death of the spouse, the
trust is held for your children.
3. At the death of your children,
the funds can be held for the benefit of your grandchildren,
and so on.
In theory, the trust can last forever, allowing many generations
to benefit from your planning. You can draft the trust so that
each successive beneficiary has access to the principal, if
needed. Or the assets can "roll over" to the next
generation. In this way, it would be relatively easy to build
up vast amounts of wealth quickly.
Choose Correctly
Giving gifts can provide you with peace of mind, because you’re
helping a loved one. But you need to choose the right gift for
each situation. If you need help, please call us.
|
|
|
:
312.321.0300 > 
: 312.321.0364
> 
: