Is it Time to Reduce Your Taxable Estate? Gifting Makes Everyone Happy
Lee Rosenberg, CFP | August 3rd, 2009The old adage about turning lemons into lemonade may turn out to be true with investment portfolios. While we all struggle with the down market and the possibility of further decline before it bottoms out, now may be a good time to gift a portion of your assets to beneficiaries, thereby reducing your taxable estate. (This is for federal taxes only. State laws on transfer taxes vary and may or may not apply).
The key advantages are:
o Lowering your property transfer taxes (for gifts and estates)
o Helping family members whose financial needs are greater than yours
o Allowing the assets to grow in a beneficiary’s estate, further reducing your tax burden
Here are some gifting options to consider:
Annual Gift Tax Exclusion: Each year you are permitted to gift an individual up to a maximum of $13,000 tax free. There is no limit to how many people you can gift. You are also permitted to double that amount if you and your spouse team up (gift splitting). There is no maximum gift amount if you pay someone’s tuition or medical bills, provided you can prove that you wrote the checks directly to the college or medical provider.
Personal Loans: If your children need help with a down payment on a house or college tuition, loan them the money at the IRS’s minimum allowable interest rate (the AFR) and then forgive the amount equal to the annual gift tax exclusion, which in 2009 is $13,000.
There are also three types of irrevocable trusts:
Grantor Retained Annuity Trust (GRAT) This is a fixed term trust (e.g,10 years) which lets you gift assets you expect will have increased value down the road. You get the annuity payments, but at the end of the term, your beneficiary receives the value of the trust. Although this is a taxable gift, the annuity payments are calculated to result in a gift tax value of zero, leaving a substantive value at the end of the term which is passed on to the beneficiary tax free.
Intentionally Defective Grantor Trust (IDGT): This trust allows you to transfer income-producing assets while maintaining partial control because you are paying the income tax on the trust income (however, upon your death, the assets in the trust won’t be counted as part of your taxable estate).
Charitable Lead Trust (CLT) Place assets into a charitable trust and receive a gift tax deduction equal to the current value of the income stream that is earmarked for the charity. The lower the interest rate, the higher the deduction.
Given the current financial picture, ‘tis the season to be gifting. Bottom line is that it may be just as good to give as it is to receive.
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Tags: annual gift tax exclusion, charitable lead trust, gifting options, grantor retained annuity trust, intentionally defective grantor trust, irrevocable trusts, lee rosenberg, lee rosenberg cfp, personal loans, taxable estate
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
