By FPA Members Elaine King, CFP®, CDFATM and Philip Herzberg, CFP®, AEP®, MSF
Last Updated: October 1, 2012
Is it worthwhile and appropriate for you to plan year-end significant gifts now to reduce transfer taxes that otherwise would likely be payable in estate taxes in future taxes?
Because of future policy uncertainties related to a possible gift transfer tax lifetime exemption decrease and tax rate increase for gifts in excess of the exclusion amount (for 2012: 13,000), it may be beneficial to evaluate the timing of your gift with your advisor.
In conjunction with the guidance of a qualified estate planning attorney and advice of a CERTIFIED FINANCIAL PLANNERTM professional from the Financial Planning Association®, you should assess your financial condition to determine if making significant gifts at minimal tax cost for the remainder of this year would be beneficial for you and your family. Prudently evaluate your donative intent and future cash flow needs prior to structuring and passing on a large gift.
Understanding that these opportunities may be most suitable for substantial estates (i.e. larger than the current indexed $5.12 million per-individual estate tax exemption), you can peruse and utilize the following year-end gift tax saving tips to enhance your peace of mind and future financial security of your loved ones:
- Recognize that you are presently permitted to annually give up to $13,000 of assets (i.e. cash or non-cash items) per person without incurring any gift tax or generation-skipping transfer (GST) tax consequences. Note there is no limit on the number of gifts if they are made to different individuals or trusts, and your recipients do not have to be relatives. If your spouse joins you in electing to apply his or her annual exclusion amount to a transferred asset by gift-splitting, you can pass on double the exempt amount ($26,000 for 2012) per donee. To qualify for gift-splitting, be wary that both you and your spouse must be U.S. citizens or residents at the time of the gift.
- How can you devise year-end gifts when you are a U.S. citizen and your spouse or family member is not a U.S. citizen? Keep in perspective that partners who are both U.S. citizens can give unlimited amounts of money to each other without being subject to gift taxes. In contrast, you can gift only up to the 2012 annual limit of $139,000 to a non-U.S. citizen spouse. Seek the guidance of an estate lawyer and credentialed financial professional with expertise in international planning to assist you in strategizing your gifts to non-U.S. citizens and residents.
- Pare down possible estate taxes and handle increasing private school and university education costs by directly prepaying an unlimited amount of your family members’ tuition expenses to the qualified institution. By making this direct, gift-free and GST-free tax transfer of money and out of your estate, you still leave the annual $13,000 additional gift-tax exclusion open to make gifts (i.e. room and board, books, and transportation) to your children or grandchildren. Similarly, you preserve your lifetime gift-tax exemption and incur no gift tax when directly paying your family members’ health care bills to a medical services provider.
- Be cognizant that gifts made to 529 education savings accounts for the benefit of others, such as kids and grandchildren, can provide you with a favorable tax situation, as long as you own the account.1 Further, these contributions to your child’s or grandchild’s 529 account will be out of your taxable estate. You are still allowed to take back all or part of the original gift amount if needed (value returns to your estate if you withdraw this money). Think about front-loading a 529 plan by funding up to five years’ worth of payments at once, or up to $65,000 in 2012. Elect to spread this lump-sum contribution over five years for gift tax purposes by filing IRS Form 709, the federal gift tax return form.
- Determine if your income-producing assets not needed for your retirement are viable annual exclusion gifts to family members in lower income tax brackets. Subject to you living three years after making a taxable gift, know that this property will be out of your estate with the future income taxable to the new owner. Also, you can benefit from the favorable 35 percent gift tax rate by transferring appreciated assets that will eventually be sold at a gain to a family member who pays a lower capital gains tax rate. In the event you gift property to a custodial account for your minor’s benefit, verify what types of property can be transferred under applicable state law.
- With proper legal and tax diligence, you can decide to take advantage of present low interest rates by creating a Grantor-Retained Annuity Trust (GRAT), an irrevocable right to which you transfer a taxable gift of remainder interest while receiving a fixed amount payable annually for the term of the trust. Remember that a GRAT is an optimal gifting and estate planning technique if the transferred significant assets are expected to outperform the IRS’s assumed rate over the duration of your retained interest in the property. Should you have philanthropic desires but no need for income, you can apply the same approach to establish a Charitable Lead Annuity Trust and be entitled to an immediate gift-tax charitable deduction for an annuity to a preferred charity over a period of years.
- Seek the counsel of an experienced estate planning attorney to structure outright annual exclusion gifts of closely-held business interests or other assets to future generations. With thorough planning and ongoing respect for the business structures that are employed, you can potentially reduce your gift and estate taxes over the long-term. Carefully consider using $13,000 gifts to forgive the interest or principal on loans to family members, or to monetarily assist them with a mortgage payment.
Will your year-end gifting positively impact or negatively affect you? Remember to set expectations and evaluate the consequences of every gift. Always double check with the recipient regarding gifting illiquid assets – especially if it is a family asset.
FPA member Elaine King, CFP®, CDFATM, is Chairman of FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El Dinero Hecho Facil. FPA member Philip Herzberg, CFP®, AEP®, MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations & Public Awareness for FPA of Florida/Miami-Dade. They serve on the Estate Planning Council of Greater Miami Board of Directors.