Your Tax & Business Advisor
Gifts Can Reduce Estate Taxes
By Raymond S. Kulzick, CPA, DBA, CDP
As published in the Pinecrest Tribune December 6, 1999.
Can gifts reduce my estate taxes?
A proper program of gifting can reduce or eliminate estate taxes. In many cases, the gifts can be made completely free of any other tax as well.
The potentially high cost of estate taxes is an important concern. Taxes vary depending on the amount of the estate, but can reach 55%. Although there is a high exemption amount ($650,000 in 1999, increasing each year to a maximum of $1,000,000 in 2006), total assets (including insurance and your home) commonly exceed the exemption. Gifting is one of the best ways to assure that your heirs (and not the government) receive your hard-earned assets.
Current federal tax law contains a "unified" estate and gift tax. In other words, the same tax law applies to both situations. This was enacted by Congress to eliminate numerous types of abuses; however, the basic gift loophole, as a means to avoid estate taxes, still remains for most individuals.
The good news for gift recipients is that they do not have to pay income taxes on a gift. If a gift tax is owing, it is assessed on the giver of the gift.
Gift givers can avoid paying the gift tax through two means. The first, and most widely used, is that each person is allowed to give to each other person $10,000 per year with no gift tax and no required report to the IRS. These gifts can be combined so that a husband and wife can give $20,000 to each recipient. If they have five children, they could give $20,000 to each child - a total of $100,000 per year.
The second approach, if you want to give more than the $10,000 per recipient in a year, is to file a gift tax return. Since the gift and estate taxes are "unified," you can take advantage of some of your $650,000 exemption against gifts rather than waiting to use it against the estate tax. Of course, this reduces the amount that will later be available as a credit against your estate, but you won't have to pay any gift tax as long as you don't cumulatively exceed your exemption amount. As a further advantage, the gifts of $10,000 or less do not count against your exemption.
Assets other than cash (for example, an interest in a business, land, or rental properties) are not easily divisible to meet the $10,000 limit. However, there are approaches available using partnership interests or corporate stock that allow the gifts to be made gradually over time to stay under the $10,000 limit.
Givers need to be aware that gifts must be complete. In other words, you generally cannot attach strings to them. For example, a method to get your business back later if you don't like the way your children are managing it. Complications, limitations, and possible additional savings are inherent in property gifts. For this reason, it is particularly important that these be well planned with professional assistance.
Don't have any children or other people you want to leave your assets to? Various charitable gifting plans are available that provide tax advantages and income to you while you are living and make sure that upon your death, your assets go to the worthy cause you have selected.
As with all tax and legal issues, there are many potential pitfalls with gifting programs that could void them or subject the giver or heirs to unintended taxes. Gifting is neither the only method to reduce taxes on your estate, nor is it always appropriate. Gifting is generally not applicable to spouses. Contact your CPA and attorney to be sure you meet all the requirements to take advantage of this great estate planning loophole.
Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or firstname.lastname@example.org. More information is also available on the firm's Web site at www.kulzick.com.
This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.
© Copyright 1999 Raymond S. Kulzick. All rights reserved. 991120.
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