It's well known that, when an older family member gives his or her assets to a younger family member, the family can save transfer taxes. After all, the same tax rate schedule applies to lifetime gifts and transfers at death. So, why not take advantage of all the gift-tax breaks that are available, keep estate taxes as low as they can be, and retain as much wealth in the family as possible?
There are many ways to save gift taxes, and they are all deserving of your attention. Anybody can give his or her spouse any amount of property during one's lifetime or at death, without incurring a gift or estate tax. One can also give up to $10,000 each year to any number of recipients and pay their medical and educational expenses, too - altogether free of any gift tax. And the unified credit shelters up to $675,000 in gift or estate transfers this year, as much as $1 million by 2006.
Then there are the fancier strategies. These include tax-free, generation-skipping transfers of up to $1,030,000, and tax-favored charitable gifts, conservation easements, qualified personal residence trusts and retained-interest trusts.
Donors and their families may benefit from all these techniques but, to make the most of them, the right assets need to be gifted, and this is where planning often breaks down. So, with our compliments, here's a short laundry list of some assets which should be considered for tax-efficient lifetime gifting:
(1) Assets that are growing in value such as real estate and stock. The idea is to "leverage" the gift by effectively transferring its future appreciation, too - and extracting both from the donor's eventual taxable estate.
(2) Assets that are going to be transferred, anyway. Since the donor intends the recipient to receive them at some point, transferring them sooner (before they grow in value) rather than later may trigger less gift tax or eat up less tax credit. And, since such assets aren't expected to be held by the donor when he dies, they wonít be eligible for a "step-up" in income tax basis - so nothing will be lost by accelerating the gifting timetable.
(3) Assets the family will probably never want to sell such as heirlooms or possibly business real estate. We don't worry about step-up here, either - or any income-tax planning, for that matter - so these assets become good candidates for gifting.
(4) Assets whose income-tax attributes beg for gifting. Suppose, for example, that an asset generates significant taxable income the donor simply doesn't need, and that his intended recipient is in a relatively low tax bracket. Transferring the asset will shift and shelter taxable income and shrink the donorís ultimate taxable estate.
Of course, any gifting decision needs to be made in the overall context of the taxpayer's financial plan. And never should tax motives alone drive a decision to give wealth away.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.