can Reduce Estate and Income Taxes
Distribute Assets |
According to Your Plan
... Not Uncle
the holidays just around the corner, you might be feeling
generous — and for estate planning purposes, now might be a
good time to turn your generosity into tax savings.
From now until the end of the year, you can take
advantage of the gift tax exclusion. For 2005, you're entitled
to make an unlimited number of $11,000 gifts per recipient.
Your spouse can do the same thing so jointly, you can give
$22,000 to each recipient.
in Store for the Estate
question we frequently hear: Wasn't the estate
tax repealed? Technically yes, but there are
several strings attached to the repeal that might
result in your estate eventually owing
Under a tax law passed
in 2001, the estate tax is scheduled to gradually
be phased out by 2010. But there's a "sunset
provision" that calls for everything in the law to
revert back to prior law on January 1, 2011 —
unless Congress acts to extend the estate tax
repeal. The Senate was supposed to vote on a
permanent repeal a couple of months ago, but after
Hurricane Katrina hit the Gulf Coast, the vote was
So if you die
before 2010, or lawmakers decide not to make the
estate tax repeal permanent, your estate could be
liable for tax. Here are the important figures to
remember for 2004 and later years:
the IRS just announced that the annual gift tax exemption will
increase to $12,000 in 2006.
By giving away assets
while you're alive, you can significantly trim the value of
your taxable estate. That's beneficial if you've accumulated a
fair amount of wealth. In 2005, the estate tax goes into
effect when an estate has assets of more than $1.5 million.
The tax rate is a whopping 47 percent on the net worth above
$1.5 million. (Imagine your loved ones having to forfeit
nearly half of your hard-earned savings to Uncle
Under current law, the amount of assets subject
to the estate tax and the tax rate are scheduled to be
gradually phased out by 2010 and reinstated by 2011 (see
right-hand box for more information).
So at this
point, there are many unknown factors in estate planning. You
don’t know when you'll die, how big your estate will be — and,
of course, what the tax law will be at that time. To make
matters worse, even though the estate tax is being phased-out,
the gift tax is scheduled to remain in force with a $1 million
What will happen to the estate tax after
2010 is anyone’s guess, but many people expect Congress to
reinstate it in some form. After all, 2010 is around the time
the first baby boomers turn 65 and the demand on government
resources such as Social Security and Medicare will
In short, affluent individuals must still plan for the
possibility of an estate tax and lifetime gifting can be part
of a wise plan. In addition to reducing your
taxable estate, here are some other benefits of gifting:
Some Advantages of
Future appreciation in the value of the gift will
be excluded from your taxable estate. So if you give
away an asset worth $10,000 now and at your death the asset is
worth $50,000, a grand total of $50,000 escapes taxes.
You can evaluate your heirs' ability to manage
money. Lifetime gifting gives you an opportunity to
see how your children handle wealth. If they manage it well,
you may feel more comfortable passing on more — either during
your lifetime or when you die.
If you want to
take maximum advantage of the annual exclusion in the near
future, the approaching year-end is a perfect time. Let's say
you and your spouse want to give your son at least $40,000 to
help with a down payment on a house. Together, you give him
$22,000 in December ($11,000 each for 2005). Then, on New
Year's Day, you can give him another $24,000 for the 2006 tax
year ($12,000 each).
Keep in mind that exceptions to
the gifting rules do exist. For example, paying education or
medical costs for another person is generally not a taxable
If you're interested in year-end gifts,
don't wait until the very last minute. If a gift is made by
check, it should be delivered and deposited by the
recipient by December 31 to qualify for the 2005 annual
exclusion. (However, the check can be paid by your bank in
securities have somewhat different rules, but the $11,000
annual exclusion for 2005 still applies. If the stock has
appreciated, when the recipient sells the shares, there will
most likely be some capital gains tax. But if your tax rate is
considerably higher than the recipient's, the tax bill will be
a great deal lower.
With lower capital gains tax rates,
now is a great time to give away appreciated securities to
relatives in low tax brackets.
For instance, let's say
your children or grandchildren are approaching college age.
You can give each of them up to $11,000 worth of appreciated
securities this year without any gift or estate tax
consequences. If you’re married, your spouse can give away
$11,000 to each child too. The recipients of your generosity
can then sell the appreciated securities and pay only 5
percent capital gains tax, if they're in the 10 or 15 percent
tax brackets. The sales proceeds can be used to cover college
expenses. For this to work, however, you and the gift
recipient must have a combined ownership period of more than
This strategy can backfire if the child is under age 14. Why?
Under the “Kiddie Tax” rules, some or all of the youngster’s
capital gains may be taxed at the parents’ higher rate. Of
course, that defeats the whole purpose.
considering giving stock, you should know this: A gift of
stock can be a wonderful thing, but it will be more wonderful
if you provide a few facts the recipient will need later. If
this information isn’t known, it can create problems when the
recipient tries to sell the stock, which could be decades
after you die. Take the time to provide these details with
Your tax basis (cost basis) in the
stock and the purchase date.
The fair market value on the day you
make the gift.
The amount of any gift tax you might
have paid on the appreciation of the stock.
As you can see, gifts made during your lifetime can make a
great deal of tax-sense if your estate is large enough,
compared with letting the assets be eaten away by estate tax.
Still, not everyone is comfortable with the idea of giving
away assets. You might be worried that you'll need them
someday or you may feel your children aren't ready to manage
the assets. Both are legitimate concerns. You may want to
maintain your lifestyle years from now and not watch your
children squander your savings.
Planned gift giving is
not a do-it-yourself project. You worked hard to accumulate
assets and you want to make sure they're handled properly.
Consult with your estate planning adviser to help achieve the
greatest tax savings while maximizing your wealth.