Smart Gifting Strategies

It seems like a simple idea to grasp: If you’re concerned about your financial security, the last thing you should consider is giving away your assets. But the truth is that many people can afford to transfer wealth to their heirs or a charitable cause during their lifetime, but don’t realize it.

With a top federal estate tax rate of 45%, the cost of doing nothing may result in hundreds of thousands, or in some cases, million of dollars in estate taxes paid at death. Performing a detailed analysis of their financial condition allows people to fully appreciate their options. Often, people are pleasantly surprised when the process of discovery leads them to realize that they can afford to give something away.

Leaving a Legacy

Once you realize you have the ability to make financial gifts, you’ll want to figure out how best to give. Since financial circumstances and goals vary, there’s no simple answer. But there are certainly compelling reasons to transfer assets, such as helping a child or grandchild financially. Or, maybe you want to make a difference through your charitable giving.

There are several tax reduction gifting strategies; the one you choose will depend on your goals. The first thing you need to determine is how much control you want to retain over your assets. An outright gift is just that—it means you have no control over your money once you write a check to your child or grandchild.

Another option is to set up a trust. With a trust, you have legal costs associated with setting it up and administering it, but you maintain some control over the assets and can protect them from creditors and predators, and family.

Whether it’s an outright gift to an heir or through a trust, the maximum amount—known as the annual exclusion gift—that you can give tax-free each year is $12,000 per person, to as many people as you like. For some, this may be an effective way to assist an heir as well as reduce the value of their overall estate, which can have profound estate-tax implications.

But keep in mind that while neither the donor nor the recipient is taxed on this wealth transfer, there is no income tax deduction for the giver, sometimes a common misperception. Income taxes would come into play only in the sense that the donor doesn’t have to pay taxes on the income that the $12,000 generates once it has been gifted.

It’s also important to note that these annual exclusions can’t be carried forward; you either use them or you lose them. In addition to these annual exclusion gifts, an individual can give away an additional $1 million during his or her lifetime, without paying any federal gift tax.

Generation-Skipping Transfers

There are other gifting strategies, including the rather complicated generation-skipping trust, which was used to transfer much of the industrial wealth of the 19th and 20th centuries. In the past, families were allowed to put an unlimited amount of assets into a generation-skipping trust, and beneficiaries could receive income from it, while the assets were shielded from transfer tax from generation to generation.

In 1986, the rules changed, and now there’s a $2 million limit on contributions to a generation-skipping trust. However, the purpose of doing so remains the same. It allows the capital to transfer estate-tax-free beyond your children, as well as provide a valuable layer of asset protection. Many people view these trusts as a safety net for their family. They want it to be there if a future heir had an opportunity for advancing their education, or if they wanted to start a business, and they are evermore concerned about asset protection.

(CRN# CRN #200807-2018309)

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