Women and Money: Federal Gift Tax Options Need to be Considered

Federal Gift Tax; Lifetime Gifting:

Another way to lower the amount of your estate that is taxable at your death is to give some of it away while you are still alive. This is an option for both married couples and singles whose assets exceed the federal applicable exclusion amounts (which for the years 2011 and 2012 is $5,000,000 per person). If your net worth is less than this amount, and you are single, or less than the combined amounts and you are married, then you may wish to gift for other reasons, but gifting for federal estate tax purposes is not necessary. If you are living in a state that has a state estate tax and not a state gift tax (such as Massachusetts), then gifting during your lifetime may reduce any state estate taxes that are due.

A tax advantage to gifting is that any appreciation in the value of the asset between the date of the gift and the date of your death is also removed from your estate. An obvious disadvantage to gifting is that once the asset is given away it is no longer yours. You will have lost control of the property.

Just as there is a federal tax on estates over a certain value, so there is a federal tax for gifts. Just as there is an estate tax exemption, so there are “annual exclusion amounts” for gifts – sums that can be given away without paying a tax.

Each person, at the moment, has an “annual exclusion amount” of $13,000. (This amount will increase with inflation.) This means you can give away $13,000 a year to anyone you please – and as many people as you please – and it won’t be consid­ered a taxable gift. These gifts can be in cash, fractional ownership in real estate, stocks or just about any type of asset you own.

In addition, you can pay any person’s tuition or medical expenses – as long as payment is made directly to the school or medical provider – and it won’t be considered a taxable gift. In other words, a couple could pay their grandchild’s college tuition and also give that grandchild $26,000 annually ($13,000 from each grandparent). This amount is adjusted for inflation and will increase slightly over time.

If a gift is made to the grandchild directly and she is under age, then her guardian would be in charge of it until she reaches the age of majority – which is 18 or 21, depend­ing on the state the grandchild lives in. These gifts can also be made in trust form. Many do not want to make an outright gift to a child, for example, because they intend for the gift to be used for a specific purpose, such as future tuition. They prefer to make the gift to a trust for the grandchild’s benefit.

If they do so, however, and they want the money re­moved from their taxable estate, then the trust they set up must be irrevocable; the person who sets it up cannot change it or amend it during his or her lifetime. Once it is signed it cannot be changed by anyone – the client, the lawyer, the grandchild – no one.

In addition to paying medical expenses, tuition, and giving away gifts of $13,000 an­nually, federal tax laws permit each person to give away an additional cumulative total of $5,000,000 in his lifetime without having to pay a federal gift tax. These larger gifts can also be made outright or in trust form. The federal gift credit is unified with the estate tax- you can give away the $5,000,000 during your lifetime and not have to pay a gift tax. To the extent you do not give it away during your lifetime it is available to pass estate tax-free to your heirs at your death. That means that under the current law, at least for 2011 and 2012 most married couples have a combined cumulative total of $10,000,000 they can give away during their lifetime or at death.

It is important to remember that the proverb – the tax tail should not wag the dog. Once you make a gift it is gone, gone, gone. When it is in the recipient’s hands it is subject to their creditors, their divorce and if they have young children it will affect the ability to receive financial aid. You should also consider what would happen if the person you give the asset to dies before you do – do you know where the asset is going and how much control do you want over its disposition. In other words, there are many consequences to gifting beyond the tax consequences and it is important to understand all of the risks before embarking on a gifting plan.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently announced the release of an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  Annino’s book is an exhortation, resource and trusted companion for women in all facets of life.  To purchase the book visit:  http://amzn.to/hOHuEV or for more about Annino, visit: www.patriciaannino.com



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