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Talk
to Your Family; Explain How Gifts Affect Them |
Recently,
strategies to transfer wealth by gifts to children and other
family members have been under the microscope. Transfers of
interests in a closely held business, parcels of rental real
estate, or a combination of various assets through a family
partnership have become commonplace to financial advisors and
well understood and accepted by many individuals using such
strategies. Indeed, such transfers can be powerful estate planning
tools that merit serious consideration.
But many gift recipients themselves find the strategies and
their results confusing. They may not understand the value of
what they have received, the structure within which their ownership
is held, or the cash flow, tax impact or reporting requirements
resulting from the gifts. This is why it can be critical to
talk to your family about how your gifts will affect them.
Discuss the Gifts before Giving
If the recipient is your minor child and not responsible for
his or her own finances, then there is probably no problem for
now. But, if the recipient is old enough (or, as in the case
of a minor grandchild or other family member, you are not his
or her parent), talking to the recipient (or his or her parents)
can help accomplish the following goals:
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Make
sure recipients understand the value of what they are
receiving and how the structure works. They are
much more likely to appreciate the gift (and you) if they
understand what it is. |
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Make
sure recipients understand the various cash flow, tax
and reporting requirements they will face. Things
that seem commonplace to you may be new and worrisome
to them. Remember, these minor frustrations can easily
delay the recipients’ enjoyment and appreciation
of the gifts. |
Check with the recipients regarding their particular tax situation.
You may think you are providing a distribution from a partnership
or S corporation that will "cover" their taxes. But,
the cash distributed may be less than the taxable income in
a given year for a variety of reasons. Recipients should be
well prepared if they will be writing a check for taxes, so
remind them more than once in the first year. The recipient
must recognize cash distributed earlier, invested or spent by
the time K-1s arrive. Also, be aware that the increased income
may cause them to lose certain deductions or credits. And, finally
if they are in another state, their overall tax rate may be
higher than in your state.
Here are a few more key items you might need to communicate
to the recipients (or their parents):
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If
they have never filed an income tax return before, such
as in the case of a young grandchild, they may now be
required to file. |
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If
they are accustomed to filing their tax returns early
or are applying for a mortgage or for college aid, they
may find waiting for partnership or S corporation Schedule
K-1s new and unpleasant but they should know and understand
it in advance. |
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If
they have never filed quarterly estimated taxes, they
may have to do so for the first time. |
Finally, if they do not understand the value of the gift, or
how an entity’s structure and operation will work in the
future, they may have concerns, questions or a lack of appreciation
of the gift that you need to address.
Avoid Future Frustrations
For the most part, you can avoid problems with effective and
timely communication that can leave both you and the recipients
able to enjoy the act of giving or receiving to the greatest
extent possible.
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