To Gift or Not to Gift: A Year End Question

By Mary E. Vandenack

A long time estate planning strategy is to use the annual exclusion ($14,000 for 2015) as a method to transfer assets to heirs during life in an effort to reduce estate size and ultimate estate size. In 2015, donors have a lifetime exemption of $5.43 million. If married, each spouse has a $5.43 million exemption for a total combined exemption of $10.86 million.

For those individuals who still have estate over the lifetime exemption amount, annual exclusion gifting may still be a good idea; however, consideration should also be given to income tax consequences. When a donor transfers a gift to a beneficiary, the donee (recipient of gift) receives a transferred basis.

By way of example, consider that Donor James wants to make an annual exclusion gift to each of his three children equal to $14,000. He transfers cash to Orvis and Ollie but transfers a share of X stock to Orin. The X stock has a fair market value of $14,000 but a basis of only $1,000. As a result, the gift to Orin carries with it a tax burden of approximately $5,000, which means his net gift is really only $9,000.

At Donor James death, the share of X stock will get a step-up in basis to its fair market value of $14,000. Thus, if the stock is transferred to one of James’ children the day after death, there is no tax liability that transfers with the gift. Orin can sell the stock with no gain.

For those who are now under the estate tax exemption amounts, annual exclusion gifting during lifetime may actually result in your beneficiaries receiving less in the long-term than if the estate passes at death. For those with estate tax exposure, annual gifting remains good planning but consideration should be given to the most leveraged and tax effective approach to using annual exclusions.

© 2015 Houghton Vandenack Williams
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Are There Any Exemptions to the Estate Tax?

There are exemptions to the estate tax. The federal estate tax exemption for 2014 is $5,340,000 and that pertains to each American citizen; therefore, between yourself and your spouse you have over $10,000,000 in exemption. In addition to that, there is a skip generation benefit equal in value which means that you can not only pass down to your spouse and to children, but also down to future generations by use of the skip generation with it.

© 2014 Parsonage Vandenack Williams LLC

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How Can I Leave My Estate to My Spouse Free of Estate Taxes?

A Video FAQ with Ronald K. Parsonage.

The federal government permits an unlimited marital deduction so you can transfer all of your assets, if you wish, to your spouse. Sometimes in planning it is better to use a marital deduction trust in part and use the equivalent exemption in part so that you can transfer it not only to the spouse tax free, but on to the children tax free.

© 2014 Parsonage Vandenack Williams LLC

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Estate and Income Tax Increases Likely in 2013

Unless Congress acts prior to year end, a variety of taxes will increase automatically on January 1, 2013.  Income tax rates and capital gain rates will increase on January 1.

A new 3.8% Medicare tax comes into effect on January 1, 2013.  The new Medicare tax is imposed on is imposed on investment income in excess of certain thresholds (adjusted gross income of $200,000 single/$250,000 married).  Investment income includes income received from rents, stocks, bonds, mutual funds and other investments.  Income that is derived in the ordinary course of a trade or business is not included.  Taxpayers should review investment portfolios, asset structure, and business structure to minimize the impact of the new tax.

The estate tax exemptions for gifts during life or at death and the generation skipping transfer exemption will decrease from $5.12 million to $1.0 million, $1.0 million and $1.4 million respectively.  Those with assets in excess of $1.0 m should at least review and consider planning options prior to December 31, 2012.

© 2012 Parsonage Vandenack Williams LLC

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