Provided by
Offices in:
Clearwater
•
Tampa
• Sarasota
•
Naples
•
Ft. Myers
Toll-Free: (800) 660-7564
Email:
info@covertlaw.com
Planning
Today for Today's LifeStyle.
|
If given the choice, would you
rather transfer your wealth to the IRS or to your loved ones? If you
answered the IRS, then disregard this article, you will find it of little
benefit. On the other hand, if you answered your loved ones, then read on.
First, we will review some of the relevant tax rules for lifetime gifting,
then we will examine two common transfer methods, along with a few of
their potential pitfalls.
Gifting Fundamentals
Every taxpayer may transfer up to $11,000
each year to an unlimited number of individuals. This is known as the
Annual Gift Exclusion (AGE).
Through gift splitting, spouses may give a total
of $22,000 each year to an unlimited number of individuals (even if only
one spouse is the sole source of the funds gifted). Such lifetime gifts
made within these dollar limitations do not trigger gift taxes when made,
nor do they reduce the combined Applicable Exclusion Amount available to
protect lifetime transfers of wealth exceeding AGE limits and post-mortem
transfers of wealth. Accordingly,
maximizing transfers within the limits of the AGE has been and remains a
prudent method to transfer wealth between generations. [Exception:
Qualified payments in any amount made directly to an educational
institution for tuition and directly to a provider of medical care on
behalf of any individual are fully excluded from gift tax consideration.
They may be made without dollar limitation.]
EGTRRA
Exemptions
Under the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA), taxpayers will be able to make total
lifetime tax-exempt transfers of wealth totaling $1 million independent of
the AGE limitations for tax years 2002 and beyond. For example, in 2002, a
widowed taxpayer with five grandchildren could transfer a total of
$1,050,000 to them free of gift taxes. Additionally, this $1,050,000 would
be excluded from the donor’s estate for determining any future estate
tax liability, as would any future appreciation on the gift. [Note: On the
downside, however, the grandchildren would receive their grandparent’s
cost basis in the gift, triggering potential capital gains taxation on the
appreciation above cost basis. That said, proper Life & Estate
Planning often requires balancing your tax and non-tax objectives.]
Depending on the size of your overall estate and
your ability to make gifts without affecting your lifestyle, maximizing
your lifetime wealth transfers may be a tax-savvy strategy given the
uncertainty of estate tax repeal beyond 2010.
Nevertheless, once you have made the decision to
be inter-generationally generous, the next decision is how to make the
transfer. Two popular methods are outright gifts and custodial accounts.
Outright Gifts
An outright gift with no strings attached
is the simplest method of making a lifetime wealth transfer, you simply
deliver the asset directly to the donee. Once in the hands of the donee,
however, your gift may be taken away from them through a divorce, lawsuit
or bankruptcy. More commonly, your gift may be squandered, because you
have no further control over an outright gift once delivery is made. Fact:
No one appreciates the value of a dollar like the person who earned it
(and paid taxes on it). Fortunately, the law provides at least one simple
alternative to protect gifts, particularly when made for the benefit of
minors.
Custodial Accounts
Custodial
accounts established under the Uniform Gifts to Minors Act (UGMA) or the
Uniform Transfers to Minors Act (UTMA) are very popular methods of making
transfers to loved ones who are minors. They are popular because they are
convenient and inexpensive to create. Almost all financial institutions
offer such arrangements.
Beware: The account becomes the unrestricted
asset of the beneficiary upon reaching age 18 or 21, depending on
applicable state law. In other words, it could be used for fast cars and
stereos, instead of books and tuition.
Summary
Inter-generational generosity makes good
sense for a variety of reasons. Nevertheless, great care must be given to
the method of transfer to avoid potential pitfalls. A Crummey Trust is an
alternative transfer method to consider, if you want to make gifts with
strings attached.
|