Newsletter – June 2014

Gifting of Assets

 

One common tax planning tool is the gifting of assets. This typically takes place among families and usually involves the gifting of cash or financial instruments. In most cases the gifting is used to transfer assets from one family member to another to reduce a donor’s estate for estate tax purposes. But gifting can also have it’s income tax benefits as well such as gifting certain financial instruments. What will be discussed here are some basic gifting rules as well gifting strategies.

 

Gifting 101

 

Each person is allowed to gift up to $14,000 per year per donee (2014 limits) without incurring any gift tax or file a gift tax return. You can gift over $14,000 per person but the donor will be subject to the gift tax and also will be required to file a gift tax return. However, each person is entitled to as lifetime gift exemption of $5,340,000 (2014 limits) without paying the gift tax. What this means is that you can gift a significant amount of assets in your lifetime and never have to pay the gift tax. If there is a gift tax that is assessed on a gift tax return then that tax will be offset by the lifetime credit until your lifetime gifting exceeds the lifetime gifting threshold. For most people they will never gift even close to the lifetime exemption. The gift tax rate for 2014 is 45%. Any lifetime gifts that exceed the lifetime gift tax exemption will pay 45% of what is gifted in taxes. Any annual gifts that exceed the $14,000 per year exemption are added back to the estate of the donor when he or she dies and could be subject to the estate tax.

 

Gift Tax Exemptions

 

There are some gift tax exemptions which you can gift assets and they are completely tax free gifts. You can make financial gifts for medical purposes and those gifts are completely tax free as long as the gifts are made directly to the medical provider. Another exemption is for educational expenses. You can make unlimited financial gifts for education purposes. The gifts have to be for tuition at a secondary school and the gifts have to be made directly to the educational institution. You can also make unlimited lifetime gifts to your spouse that will not be subject to the gift tax.

 

Gifting Strategies

 

There are two basic types of gifting strategies. One is used for estate tax purposes and the other for income tax purposes. For gifts related to estate planning the goal is to remove or transfer assets from your estate that may be subject to the estate tax and gifting those assets to somebody else. Remember you can up to $14,000 per year per donee that will never be taxed. Ideally a husband and wife can each contribute $14,000 each for a total of $28,000 per donee. That is a significant amount of assets that can be gifted every year that will never be subject to the gift tax or estate tax. Another gifting strategy is used for income tax purposes. This strategy involves gifting highly appreciated assets (typically a security) to another family member (usually a child) and then the family member will sell the security for a gain and will be assessed very little income tax on the sale. How this works is that the donor is usually in a higher income tax bracket and when the gift is made to the family member the family member receives the donor’s basis or original cost of the security and then sells the security at a significant gain but because the family member is in a lower tax bracket there will be less tax assessed. Essentially by gifting the highly appreciated asset to the family member you are also shifting to a lower income tax bracket and in many situations paying much less in income taxes.