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Gift and Estate Planning Year-End Tax Considerations

Gift and Estate Planning Year-End Tax Considerations

Some estate planning year-end tax tips:

  • Unlimited gifts or bequests to a spouse are tax-free
  • Outright gifts up to $14,000 per year per person are tax-free. Gifts are not taxable to the recipient
  • Note that certain gifts to a trust might not be eligible for the $14,000 exclusion. The exclusion only applies to gifts of present interests. Generally a gift to a trust where the beneficiary has no current withdrawal right is not a present interest and the annual exclusion does not apply. This includes grantor retained annuity trusts (GRAT), qualified personal residence trusts (QPRT) and any trust that does not permit that right
  • Gifts to a life insurance trust to pay for life insurance premiums can qualify if the trust permits a limited withdrawal right, called a Crummey power, and the beneficiary receives and signs a Crummey Letter which provides a window of time for them to make withdrawals. Other irrevocable trusts can also provide the withdrawal right
  • Gifts over the $14,000 per person limit are aggregated over the donor’s lifetime and are not taxed until they exceed $5,250,000
  • The $14,000 and $5,250,000 dollar limits are doubled if the spouse consents on a timely filed gift tax return
  • The $14,000 and $5,250,000 amounts will be adjusted periodically because of inflation. For 2014, the $14,000 annual exclusion will not change but the lifetime exemption will increase to $5,340,000
  • A big benefit of gifts, aside from removing the asset from the eventual estate, is that the future appreciation and income will also be removed from the estate
  • Consider making five years maximum payments to a Section 529 plan to provide for tuition for each of your grandchildren’s college plans. Note that the donor can take this money back, with tax and penalty (if they subsequently change their mind and want the cash back)
  • Leverage can be maximized by transferring partial non-control interests in businesses, real estate and investment portfolios. This is a highly sophisticated and effective way of reducing eventual estate taxes and should be discussed with an estate planning expert
  • An effective estate planning technique is to establish a captive insurance company under Section 831(b) for transfers up to $1,200,000, but it must be done before year-end, so get a move on it to find out how it can apply to your situation
  • Gifts made to someone more than a generation younger are subject to a generation skipping transfer tax in addition to the gift tax. An example is a gift from a grandparent to a grandchild. This needs to be discussed with a knowledgeable advisor when these are contemplated
  • Gifts to minors must be made to a custodian account which will give the minor the right to the funds when they reach majority, usually at age 18. The donor should not be the custodian since such accounts will be included in their estate. Usually a parent is the custodian
  • A better way to make gifts to minors is to use a trust to delay distribution beyond majority to any age you predetermine, and you can add other restrictions that cannot be done with a custodian account
  • Gift tax returns (Form 709) are required to be filed to report taxable gifts, generation skipping transfers and also where there is a consenting spouse
  • If a cash gift of $28,000 will be made by one spouse, there will be no gift tax if gift tax returns are filed with the spouse giving their consent. If each spouse makes a gift of $14,000 to the same person, then no gift tax returns need to be filed to claim the exemption. Therefore, husbands and wives making cash gifts over $14,000 and up to $28,000 to the same person should each make separate gifts for half the amount to avoid filing gift tax returns. This may not apply to non-cash gifts or cash gifts to a trust. Check with your advisor
  • Direct payments of tuition and medical care do not count as a gift and, as such, are tax free. Note: A gift of the exact tuition amount to the student who immediately signs it over to the school will not qualify as a direct payment. The payment must be directly made to the school or medical care provider
  • Support of and other payments for your minor children do not count as a gift
  • Charitable and certain political contributions and are not part of this tax
  • Gifts and transfers can be made directly to someone or placed in a trust for their benefit
  • Those who expect to have a taxable estate should plan to make year-end gifts using GRATs, QPRTs, installment sales to defective grantor trusts, charity remainder or lead trusts or charity gifts to donor advised funds or private foundations
  • Review your will and all trust agreements and make sure they comply with what you want to do. Make sure theyare not outdated
  • Consider living trusts, asset protection and dynasty trusts
  • For very large potential taxable estates with growing assets, consider massive taxable gifts now to freeze today’s value at a discounted amount. Also the cash used to pay the gift tax will also be out of your estate (if you live beyond three years after paying the tax)
  • If “taxable” gifts are made that are not taxed because the lifetime exemption offsets it, then the lifetime exemption will be that much lower when the person dies and the estate tax return is filed
  • Even though there is portability for unused lifetime exemptions, a better strategy is the credit shelter method which makes sure each spouse has sufficient assets in their own name
  • Gift tax returns accumulate excess gifts and generation skipping transfers by including all prior years’ gifts
  • Gift tax returns become a permanent record that can be audited when filed, or when the donor dies (sometimes decades later) depending upon the transactions and how they are reported on the gift tax return. Because of this, it is extremely important to file complete gift tax returns and include all disclosures, including valuation reports for gifts with valuation discounts
  • All gift tax returns must be retained by the donor as they will be needed to be attached to the estate tax return when the donor dies
  • A person receiving a gift of appreciated property will assume the basis of the donor and when they sell those assets will have to pay tax on the capital gains that existed when the gift was made, as well as any additional appreciation afterward. For this reason, it is advisable for donors to consider making gifts of cash or high basis assets rather than low basis or highly appreciated securities, unless they are subject to valuation discounts. Check with your advisor on this
  • Many states do not have a gift tax. In some circumstances, people in those states should consider making much higher gifts that will be sheltered on the federal return and that will completely escape state inheritance taxes. Again, check with you advisor

These are some pre-year-end tips. There is still time, but most of these opportunities expire when the ball drops on New Year’s Eve. For more information on an integration of gifting with your estate plan, consult your advisor.

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