Masthead Graphic

The Estate Tax & Lifetime Gifting  

 

 

Dear Friend,Catherine Head Shot
 
April 15th is less than 2 months away and if you are anything like me, you are probably grumbling about having to pay taxes.

Clients often ask me about ways to lessen the tax burden so that their heirs are not encumbered by a large estate tax.  With this in mind I am including a recent article by Rande Spiegelman at Schwab in this February newsletter.  I hope it gives you some ideas. 

As always, ask for feedback from your accountant or estate planning attorney.

Stay warm!

 

Warm regards, 

 Signature

Catherine Maniscalco Avery

 

The backbone of CAIM is to employ a classic long term investment strategy including dividend paying stocks. CAIM is an independent, women owned investment management firm specializing in managing investment portfolios for women and baby boomers.

203.966.2712  p
203.966.5697  f 



February  19, 2015|  Issue No. 59
In This Issue
Estate Tax & Lifetime Gifting
New Rules & Regs 2015
Holiday Gifting 2014
Quick Links
Find Out More
Call me at 203.966.2712
or visit www.caimllc.com.

 


     The Estate Tax and Lifetime Gifting                    
by Rande Sp
iegelman  
                                                                                                               
Key Points
  • Spreading gifts throughout your lifetime is a great strategy to help reduce estate taxes. Just be sure to leave yourself enough to live on.
  • Making payments directly to medical and educational providers on behalf of loved ones and giving away up to $14,000 per recipient per year gift-tax free are good options for minimizing taxes.
  • Any exemption you use for gifting will reduce the amount you can use for the estate tax.

As a general rule, it's better to give away money to your loved ones during your lifetime than to wait until after you pass away. There are numerous ways to give money gift-tax free while you're alive-and even if your gift is taxable, at least the recipient will be able to enjoy the gift's full value while you pay the taxes on it. In contrast, if your estate is subject to the estate tax, those taxes will come directly out of what your loved ones would otherwise inherit.

 

Picture four quarters on the table in front of you. If you were to die with all four quarters and were in the 50% estate tax bracket (the current top rate is 40%, so 50% is not unimaginable), your heirs would be left with two quarters and the federal government would get the other two.1 That's the estate tax in action.

 

Now imagine a different scenario. You start with four quarters and move two of those quarters, representing a lifetime gift to your loved ones, aside. Now you take one quarter and move it to the other side of the table as the gift tax you would owe.1 Your beneficiaries would have as much as they did in the first scenario, and you still have a quarter left!

 

Gifting provides a couple of added bonuses. Any future appreciation on the gift is in the hands of the beneficiary and outside your estate. Plus, you get to participate in the enjoyment of the gift while you're still around.

 

Below are the rate and exemption levels for gift and estate taxes in 2015:

 

Estate Tax:   Top Rate = 40%,   Exemption = $5,430,000 per person2

Gift Tax:  Top Rate = 40%,    Exemption = $5,430,000 per person2 

Source: IRS.gov

 

How the gift tax works

Currently, you can give up to $14,000 each to any number of persons in a single year without incurring a taxable gift ($28,000 for spouses "splitting" gifts). The lucky recipient of the gift typically owes no taxes and doesn't have to report the gift unless it comes from a foreign source.

 

You can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift.

 

However, if your gift exceeds $14,000 to any person during the course of the year, you have to report the taxable gift on a Gift Tax Return (IRS Form 709). Spouses splitting gifts must always file Form 709, even when no taxable gift is incurred.

 

For taxable gifts, each donor has an aggregate lifetime exemption before any out-of-pocket gift tax is due. In other words, under current law you can give away up to $5.43  million2 during your lifetime-over and above the annual $14,000 exclusion and any payments you make directly to educational or medical providers on someone else's behalf-and still avoid gift tax.

 

There's one big caveat here. Whatever exemption you use for gifting will reduce the amount you can use for the estate tax-the $5.43 million2 exemption applies to gift and estate taxes combined. (This is what the IRS refers to as a "unified credit.") That said, surviving spouses may claim any unused exemption from the deceased spouse.

 

Example 1: You're unmarried and give away $3 million (over the $14,000 per person annual exclusion) during your lifetime. After you die, $2.43 million of your estate is still exempted from the estate tax.2

 

Example 2: Your spouse gives away $4 million and you give away $1 million (over the $14,000 per person annual exclusion) during your lifetimes. If one of you passes away, the surviving spouse will have a $5.86 million estate tax exemption ($1.43 million of unused exemption from your spouse plus $4.43 million of your unused exemption).2

 

Lifetime gifting and estate planning

Typically, taking advantage of the annual $14,000 exclusion and making payments directly to medical or educational providers on behalf of loved ones is a great strategy that helps preserve your lifetime exemption.

 

Most advanced wealth-transfer strategies minimize gift taxes by taking advantage of the annual exclusion, the lifetime exemption and valuation discounts available under the law (a valuation discount means the gift is worth less than its apparent value for gift tax purposes).

 

Finally, a couple of caveats:

  • Lifetime gifting can be a great strategy, as long as you leave yourself enough to live on. For the gift to count, it has to be irrevocable, so be sure to plan carefully with the help of a professional.
  • If the estate tax is ever repealed, as it was for the 2010 tax year, you may regret having paid gift tax now in an effort to minimize your estate tax. You have to do the best you can, based on what you know now, within the context of your goals.

1 This hypothetical scenario assumes you have already exhausted your gift-tax exemption during your lifetime, leaving you subject to full taxation on the remaining gift or estate.

 

2 Estate and gift tax exemptions are adjusted annually for inflation.

 

separator
New Rules & Regs

Important changes and updates are afoot in the areas of IRAs, Social Security, Medicare and taxes that may affect how... Read more >>
separator
Holiday Gift Giving 2014 

T'is the season for giving and CAIM has always advocated the gift that keeps on giving, namely... Read more >> 
separator
©Copyright 2015, CAIM LLC

Disclaimer: NO CONTENT PUBLISHED AS PART OF THE CAIM LLC NEWSLETTER CONSTITUTES A RECOMMENDATION THAT ANY PARTICULAR INVESTMENT, SECURITY, PORTFOLIO OF SECURITIES, TRANSACTION OR INVESTMENT STRATEGY IS SUITABLE FOR ANY SPECIFIC PERSON.  TO THE EXTENT ANY OF THE CONTENT PUBLISHED AS PART OF THE BLOG MAY BE DEEMED TO BE INVESTMENT ADVICE, SUCH INFORMATION IS IMPERSONAL AND MAY NOT NECESSARILY MEET THE OBJECTIVES OR NEEDS OF ANY SPECIFIC INDIVIDUAL OR ACCOUNT, OR BE SUITABLE ADVICE FOR ANY PARTICULAR READER.  EACH READER AGREES AND ACKNOWLEDGES THAT ANY SPECIFIC ADVICE OR INVESTMENT DISCUSSED IN THE BLOG MUST BE INDEPENDENTLY EVALUATED BY THE READER AND HIS OR HER ADVISER IN VIEW OF THE READER'S INVESTMENT NEEDS AND OBJECTIVES.
 

CAIM, LLC | 27 Pine Street | New Canaan | CT | 06840