Whether helping the kids with a down payment on their first home,
paying the premiums on a life insurance policy in an irrevocable trust,
or moving appreciated assets to a younger generation, annual gifting
will touch the lives of millions of Americans. But before the transfer
is made, an investor should spend some time looking at the investment
and the tax ramifications of the property to be passed.
Much of
the gifting itself will be done under the Annual Gift Tax Exclusion, a
method that alleviates both a gift tax and the need to report the
transfer. This exclusion applies to gifts only between individuals.
Gifts made to charities and other organizations fall under a completely
different set of rules. The transfer is not deductible by the
donor nor is it taxable to the recipient. Currently (in calendar year
2005), the annual exclusion is set at $11,000. In the future, this can
be adjusted for inflation, but only in $1,000 increments. Spouses can
increase their gifts to others to a maximum of $22,000 and, finally,
gifts between spouses, like love, knows no limits. Most transfers
are done for one of two reasons. In the past, passing along property to
diminish the value of an estate and, therefore, estate taxes was a
major consideration in estate planning. This is still used extensively
for larger estates but, under current law, fewer estates are subject to
the tax. If the estate has no tax exposure (and if nursing care is
taken care of), many advisors recommend not to gift at all but,
instead, toallow the assets to receive a “stepped up" tax basis upon
death. Gifting to allow for current use of assets has been and
continues to be popular. Often a parent wants to see a child use the
gift immediately in order to enjoy an extended vacation or to make a
major purchase. Here, it is expected that any gift of securities will
be converted into cash with the appropriate tax paid. Both donors
and recipients should be aware that various gifts for educational or
medical purposes may not reduce the annual exclusion. You should check
with your tax advisor to determine whether this applies to a your
specific situation. Certain kinds of property (real estate, art,
collectibles, closely held business interests, etc) should be appraised
before a transfer is made. Consulting an expert in the particular field
is usually a good idea to calculate the fair market value of the
property. Another circumstance requiring professional help is
when “spending down" an estate for Medicaid purposes. An elder law
attorney should be consulted for help in this area. The actual
gift of marketable securities or cash is fairly straightforward. Giving
a check to someone or journaling over securities is enough to complete
the gift. However, before making the gift, you should understand some
of the potential tax considerations. Let's first look at stock
that has appreciated in value. Remember, whatever tax basis the donor
in the gifted property will become the recipient's tax basis. If the
donor is in a higher tax bracket than the recipient, it is often wise
to gift the stock to the recipient and let the recipient sell the stock
at his or her lower tax bracket. If the fair market value of the
stock is below the donor's original cost, then the donee must use the
fair market value of the property as of the date of the gift in
determining his or her tax basis. If you find yourself in this
situation, the donor should consider selling the asset and then gifting
the cash proceeds to the recipient. Obviously, there will be
times when a gift needs to be made regardless of the consequences but,
when time allows, you should do your homework to see what works to your
best advantage. Glenn
(“Chip") Dahlke, a senior contributor to the Living Trust Network, has
28 years in the investment business. He is a Registered Representative
of Linsco/Private Ledger and a principal with Dahlke Financial Group.
He is licensed to transact securities with persons who are residents of
the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ,
NY.OR, PA, RI, VA, VT, WY. If you have any questions or comments, Chip would love to hear from you. You may contact him by email at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network's web site at http://www.livingtrustnetwork.com Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
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