A strategy for helping to reduce the size of your taxable estate is lifetime gifting. A gifting strategy should be carefully planned with your Frundt and Johnson attorney to ensure that it works toward your goals and avoids potentially negative implications. A gift is removed from your estate on transfer.
An annual exclusion of $13,000 can be gifted per taxpayer, per recipient without generating a gift tax or requiring preparation of a gift tax return. For example, if a couple wants to make gifts to each of three children and their spouses (a total of 6 recipients) then each parent can gift $78,000 of value (6 x $13,000) or a total of $156,000 ($78,000 x 2) in one year.
There is a scheduled increase in the Annual Exclusion gifting amount to $14,000 per person per year effective January 1, 2013.
Married couples are allowed to “gift-split,” in which one partner makes gifts for both. For example if one parents owns all of the assets being gifted, they can make a gift as if both owned the assets.
A Form 709 gift-tax return is required if the assets gifted are hard to value or the parents are “gift splitting”.
In addition, you can make unlimited tax-free gifts for tuition or medical care on behalf of someone else if you pay the provider directly.
Donors can transfer any asset, including cash, traded or nontraded securities, collectibles or even a partial interest in a business. Hard to value assets will need an appraisal, however.
The donor’s “cost basis” becomes the recipient’s. So if a grandfather gives his grandson $13,000 of stock that was bought for $1,000, then the grandson’s taxable profit upon selling the shares will be the appreciation above $1,000.
Gifts must be “completed.” Did an aunt “give” her niece a valuable collection before she died? The Internal Revenue Service won’t think so if it finds out the aunt used these possessions until her death.
If gifts are made shortly before the death of their owner then it’s advisable to use wire transfers or certified checks to remove funds from accounts before death.
The annual exclusion is supposed to cover casual gifts like Christmas presents, so givers should take them into account so as not to exceed the annual exclusion amount.
You may use gifts to forgive the interest or principal on loans to family members, or to help with a home down payment.
You may also contribute to 529 Plans for Education. Many would-be givers worry they will need the gifted money. Gifts made to 529 educational savings account for the benefit of others, often grandchildren, offer a rare win-win tax situation, as long as the giver owns the account. Gifts made to these plans are out of the giver’s estate, yet he or she can withdraw the amount of the original gift tax with no consequences if it is needed. (Earnings can also be withdrawn, but that incurs taxes plus a 10% penalty.) Givers also can elect to make five years of annual gifts at once to a 529 account.
A gift to a charitable organization can also benefit your tax planning and asset management while you are alive.
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