Your Estate Plan
The ABCs of Gifting
By Earl H. Cohen
Attorney at Law
In spite of the current economic crisis, gifting, both to charities or individuals, remains an important part of most estate plans. For those with taxable estates, charitable gifts provide the promise of income and estate tax deductions and an opportunity to help others in need. There is a common realization that most charities have been stretched financially forcing them to seek broader financial support instead of depending on a small number of large contributors. With high unemployment and the broad loss of wealth, gifts to family and friends has taken on very new purposes, saving homes from foreclosure, helping with ever growing costs of education, medical bills and other family crises.
From a tax standpoint, income and estate taxes remain an issue for a significant part of the population. The state estate tax, as in the case of Minnesota, generally provides a smaller exemption than the Federal Estate Exemption, currently $3.5 million for each individual estate. Gifting to charities continues to provide relief from both income and estate tax through the effective use of a charitable deduction.
Gifts to individuals, whether family or friends, while not subject to a deduction, allows for the reduction of an estate, and if the gifts are made correctly, can be largely free of any tax.
Putting aside for a moment the economy and the great need for financial assistance felt by both charities and many individuals let’s look at the basics of gifting.
First, what is a Gift? A gift is a transfer of property, whether it is real estate, tangible personal property or intangibles like money or stock, for less than adequate consideration. Adequate consideration is generally the fair market value of the property transferred. A sale for less than adequate consideration can be a partial gift.
What are the tax implications of a gift? All gifts are subject to a federal gift tax. Minnesota does not have a gift tax, as is the case with most states. The top gift tax rate for 2009 is 45% and for 2010 it is 35%. Once deductions, exemptions and exclusions are applied few donors actually pay any gift tax. Gifts are not subject to income tax, although the donee is responsible for the income tax on any income earned from the property making up the gift.
- Deductions: The primary gift tax deductions are the 100% marital deduction for gifts to a spouse and the charitable deduction for gifts made to qualified charitable organizations. The key is “qualified charitable organizations”. Not all non profits are qualified to receive tax deductible contributions. Charitable status can be confirmed on the IRS’s website at www.irs.gov and reviewing IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.
- Exemptions: Certain transfers may look and feel like gifts but are actually exempt from gift tax. The primary exemptions are amounts paid directly to an educational institution for the benefit of a particular student. That means you could pay your grandchild’s college tuition without concern over the gift tax, but the check must be written directly to the college. The other exemption is for amounts paid directly to a medical facility for the medical care of an individual. As with educational expenses, the check must be written directly to the medical institution.
- Exclusions: The gift tax is subject to the annual exclusion, currently $13,000 per donee. If husband and wife join in the gift, the exclusion is doubled to $26,000. The annual exclusion is subject to an annual adjustment by the IRS. The lifetime exclusion is $1Million regardless of the number of donees or when the gifts are made. The lifetime exclusion is in addition to the annual exclusion. At death, the amount of the lifetime exclusion that is actually used, reduces the federal estate tax exclusion on a dollar for dollar basis.
Gifts in excess of the annual exclusion are reported on a gift tax return on April 15 of the year after the gift is made. There are important advantages to reporting the gift and its value, including starting the clock on the IRS’s ability to challenge the value of the gift shown on the return. For those using aggressive discounts on the gifts, filing the return in a timely manner is a must.
How do you make a gift? Making a gift can be as easy as writing a check or handing someone cash. If the gift is to a charitable organization, you must generally retain a receipt for tax purposes. For larger gifts it is good practice to do some planning with your tax advisor and/or your attorney in order to be certain that you are using the planning tool or technique appropriate to your circumstances. The charitable planning tools and techniques include:
- Charitable remainder trusts;
- Charitable lead trusts;
- Private foundations;
- Donor advised funds; and
- Pooled income funds.
The tools and techniques for individual gifting include the following:
- Revocable and irrevocable beneficiary trusts;
- Trusts for minors;
- Special Needs Trusts for beneficiaries that are receiving or may receive government assistance;
- Grantor Retained Annuity Trust, known as a GRAT;
- Grantor Retained Unitrust, known as a GRUT;
- Grantor Retained Income Trust, known as a GRIT;
- Qualified Personal Residence Trust, known as a QPRT, and a form of a GRIT;
- Self Cancelling Installment Note, known as a SCIN;
- Installment sale to an intentionally defective trust. Yes, that was not a typo. The trust is intentionally made defective. How the trust actually works and its uses will be the subject of another article.
- Family Limited Partnership/Family Limited Liability Company. While generally not thought of as a gifting tool, the ownership interests of the FLP or FLLC can be valued at a discount and gifted as part of a gift plan.
Do I have enough assets to engage in gifting? As we seem to be emerging from the recent economic downturn, most people look at their core asset base and feel less wealthy. As one client recently put it, “My 401k looks more like a 201k”. The answer for each of us comes from an analysis of our financial plan. We always caution clients to carefully consider whether they have the core asset base necessary to cover their necessities and obligations, including education of their children and their retirement. This also means having a realistic view of their budget, both current and anticipated. This analysis is usually prepared by their financial planner and will depend on a wide variety of factors, including anticipated income needs, likelihood that their core assets will indeed be available when needed, their age, their financial obligations, among others.
Feel free to contact Earl H. Cohen or Jeffrey C. O’Brien at 800-4016-194 for more information, including informative monographs on the gifting tools and techniques discussed above or for any questions you have on your plan.
