If you regularly make annual gift tax exclusion gifts to family members, or think you may want to start, consider leveraging your gifting with an irrevocable trust.  Call the Atlanta law firm of Hindson & Melton LLC for more information about annual gifting, irrevocable trusts, and other estate planning ideas to benefit your family.  And have a great 2018!

© Karen S. Hindson, Hindson & Melton LLC

Additionally, you can make unlimited payments directly to some educational and medical providers on behalf of someone else.  Of course there are regulations – for example, qualified education expenses are limited to tuition and you cannot pay for books or room and board as a qualified education expense.

The 2016 total exemption applying to estate tax and lifetime gifting is $5,450,000; for 2017 it will increase to $5,490,000.  If you make a gift to any individual that exceeds the annual gifting exclusion amount ($14,000), that will reduce your lifetime (including estate tax) gift amount.  At death, any unused exemption can be transferred to a surviving spouse but this requires a timely filing with the IRS.

If you have an estate that is potentially subject to estate tax, we can assist you with strategies designed to minimize your taxable estate and transfer wealth to the next generation.  This includes holding life insurance outside of your estate using an irrevocable life insurance trust, or using tax savvy trusts such as grantor retained annuity trusts (GRAT) to help keep the taxable value of your lifetime gifting low.  Contact us for more information about estate tax savings or gifting strategies that are right for you.

Karen Hindson, Hindson & Melton LLC

ALSO SEE

• Estate Planning Tips
• Estate Tax Portability
• Estate Tax and IRAs

• gifting outright,
• gifting to a trust with Crummey powers,
• gifting to a Section 2503(c) Trust,
• gifting to a UGMA/UTMA account, or
• gifting to a Section 529 plan.

Which facts are important in selecting the type of annual exclusion gift?

The most appropriate tool(s) for your annual exclusion gifts to minors will depend on factors such as your age and health, the total amount of your estate and the specific assets you own, your tax basis in the assets, the age and personal characteristics of your intended recipients, your goals for the gifts, your and your recipients’ tax brackets. Your state’s tax laws, UGMA/UTMA statute, and Section 529 plan options may also be important considerations.

What is the maximum amount of annual exclusion gift for 2012?

For 2012, an individual can transfer $13,000 to an unlimited number of recipients (including minors) as annual exclusion gifts.  A married couple can agree to have gifts treated as split gifts thereby giving as much as $26,000 to a single recipient.  The annual amount is indexed for inflation, but only in increments of $1,000.  That is why the annual amount has not changed in several years even though it is indexed.

Such annual exclusion gifts to minors and others are exempt from gift tax, and are not included within the giver’s estate for estate tax purposes.   A significant amount of wealth can be transferred by a systematic annual gifting program without estate, gift, or generation-skipping transfer taxation.  Recipients could include children, grandchildren, great-grandchildren, nieces, nephews, unrelated friends or even strangers.  There is no limit on the number of recipients.  The donor can give property directly, and can also arrange for gifting by his or her agent under a power of attorney if the power of attorney specifically authorizes such annual gifting.

What assets qualify for annual exclusion gifts?

Gifts might consist of cash, stocks or bonds, works of art or even real estate.  For real estate valued at more than $13,000, fractional interests can be given in order to keep each year’s gift below the annual tax-free gifting limit.

The gift cannot be a “future interest in property”; this restriction makes gifts to trusts subject to special rules.  Gifts to corporations also have special rules.

How do I select which assets to give away as part of my annual gifting plan?

Your estate planner can help you identify which specific assets you might use for annual exclusion gifting.  Assets that are expected to appreciate in the future are good candidates for gifting in most cases since the appreciation of the asset after the gift will be outside the donor’s estate for estate taxation purposes.  Depending on the relative income tax brackets of the donor and donee, assets which produce significant income might also be an appropriate gift.  Assets that are subject to valuation discounts (for lack of marketability and lack of control) can be attractive alternatives, but gifting of such assets requires careful planning and documentation.   The donor’s tax basis in the asset is also an important consideration, since the recipient of a gift receives the donor’s basis, while there will likely be a “stepped up” basis if the donor owns the asset at death.

UGMA/UTMA Accounts

UGMA/UTMA accounts are simple to open, but result in the minor receiving the assets when he or she reaches age 18 or 21 (depending on state law).  The assets may also be included in the donor’s estate for estate tax purposes if the donor is custodian and dies before the minor reaches the state’s applicable age.

Section 2503(c) Trusts

A Section 2503(c) trust must meet certain requirements in order to qualify for the annual exclusion.   The trust can have only one beneficiary and must be irrevocable.  The trust can extend past the beneficiary’s 21st birthday only if the trust authorizes the beneficiary to require distribution of trust assets by written notice to the trustee for a period of time after the beneficiary reaches age 21.  The identity of the trustee is important because selecting a parent of the child or the grantor or grantor’s spouse as trustee can result in adverse tax consequences.  If the child dies before age 21, the property in the trust will generally be payable to the beneficiary’s estate.

Section 529 Plans

Section 529 plans vary from state to state.  Gifts to a Section 529 plan must be gifts of cash, not property.  The 529 plan account’s income is tax-free until withdrawal, and withdrawals for qualified higher education expenses are tax free.  Since section 529 does not require the donor or recipient to reside in the state that sponsors the plan, it is possible to shop for the best plan.  There may be state income tax advantages to investing in your state’s plan, however.

Trusts with Crummey Powers

Gifting to a trust with Crummey powers is another alterative for annual exclusion gifts to minors.  “Crummey” powers are named after a federal court decision from the Ninth Circuit in 1968, found at 397 F.2d 82.  However, Crummey trusts are considerably more complex than the other alternatives for annual exclusion gifting and there is significant risk that the IRS will continue to challenge Crummey trusts in the future.  This adds to the attraction of other planning alternatives for many families.

Hindson & Melton LLC can assist with development of an appropriate plan for your annual exclusion gifts to minors, gifts to family members, or gifts to others.
Karen S. Hindson       ©Hindson & Melton LLC      September 10, 2012

Rules about estate planning annual exclusion gifts.

The most common type of estate planning gifts are the so-called “annual exclusion” gifts which are excluded from gift tax.  The current amount of annual exclusion gifting is a maximum of $13,000 per year to each individual recipient.  The gifts may be made to an unlimited number of individuals.  If the spouse of the donor consents, the couple can effectively give each individual recipient $26,000 per year.  Since 1999, the amount of annual exclusion gifting is adjusted annually for inflation.

Many families make annual exclusion estate planning gifts each year to children and/or grandchildren in order to reduce the size of the donor’s estate.  Such gifting can be used to transfer assets from one family member with a higher tax bracket or net worth to a recipient with a lower tax bracket or net worth.  If the gift is invested rather than spent, the future appreciation of the gifted asset is outside of the donor’s estate for estate tax purposes.   Over time, annual exclusion gifts have the potential to transfer considerable wealth estate tax-free to the next generations.

Practical considerations before making annual exclusion gifts.

There are several practical considerations in gifting to family members.

• It can be distasteful or even a source of conflict if the recipients of estate planning annual exclusion gifts become accustomed to receiving annual gifts and come to “expect” them rather than being appreciative.   To avoid this possibility, it might be worth exploring other gifting alternatives such as making periodic, but not annual, gifts; or paying educational expenses or medical services directly to the service provider in lieu of giving money to the family member.  Direct payments to educational institutions or medical providers for education or medical expenses are not treated as gifts under section 2503(e) of the Internal Revenue Code.
• A gift to a son-in-law or daughter-in-law stays with the son-in-law or daughter-in-law in the event of divorce.
• Making regular gifts to each grandchild will often result in an unequal distribution of your estate if your ultimate goal is to divide your estate equally between your children.   This can be particularly thorny between siblings if the gifts are being made by an attorney-in-fact under a power of attorney after you become incapacitated.   Decide in advance whether you want your attorney-in-fact to have the power to make gifts of your assets if you become incapacitated due to age or illness.
• Occasionally, family members will pressure a donor to make gifts he or she cannot afford.  This can be very awkward, especially if the donor is dependent on the family member for assistance with daily needs such as transportation.

Estate planning annual exclusion gifts are a powerful tool in appropriate circumstances.  However, you should think carefully about such gifts, your goals for the gifting, and the character and personality of the potential recipients.  If you elect to make gifts to some but not all family members, animosity or jealousy  may result.  It is a good idea to carefully discuss your gifting ideas with an experienced independent third party such as your financial advisor or estate planning attorney.  Also, you should plan in advance for your potential future incapacity, and make good decisions about whom you name as your attorney-in-fact for financial matters.  Family members are not always a good choice; an independent fiduciary may be indicated if your family members are not mature and trustworthy.

Gifts in excess of the annual exclusion are a good idea in some cases.

If you have an estate that is likely to be subject to estate taxes, gifts in excess of the annual exclusion amount may be in order.  For example, a gift of an asset likely to appreciate can remove the appreciation from the amount subject to federal transfer tax upon the donor’s death.  Additionally, any income generated by the asset after the gift goes to the recipient, not the donor.

The $5 million current gift exemption for 2012 offers some temporary opportunities for legacy gifting within families that wish to transfer signficant wealth between generations.  However, there is a possibility that using the full $5 million exemption now may subject your estate to a “clawback” of the tax to the extent that $5 million exceeds the exemption available at the time of your death.  It is imperative that you avail yourself of excellent legal and financial advice if your family has significant wealth to transfer.

Good planning is important whether you have a lot, or not!

Gifting to family members is more than a financial decision.  Good planning should take into account not only the tax-efficiency of the strategy, but also the family and relationship consequences of the strategy.  The likely impact of the gifts on the lives of the recipients should also be considered.   Hindson & Melton LLC is available to assist you in your consideration of these issues whether you have an estate worth millions or a modest nest-egg.
©  Karen S. Hindson   Hindson & Melton LLC  August 1, 2012