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Estate Planning Strategy: Giving During Life Equals Giving on Death

Estate planning strategy in California includes lifetime gifting

The Good & Bad of Lifetime Gifting Plans

An estate planning strategy gaining popularity in California involves lifetime gifting. The benefits – it’s clean, simple and easy to do. You’re also able to enjoy your kids or other beneficiaries benefitting from your generosity now rather than bestowing your legacy on death through a will and trust. Lastly, if done correctly, an estate planning strategy that involves lifetime gifting can reduce your taxable estate and provide advance assistance to your future beneficiaries. It’s not all flowers and daises though. An estate planning strategy that employs gifting must account for your lifetime cash flow needs. After all, you don’t want to outlive your assets. Additionally, Uncle Sam keeps a watchful eye over gifting. Personal monitoring comes into play too because the law changes often. Be prepared to revisit your estate planning strategy on an annual basis.

IRS 2013 Gift Tax Rules

The relevant sections of 2013 federal gift tax law are as follows:

  • Annual Exclusion Gift Amount: Individuals can gift up to $14,000/year ($28,000 for married couples) to an unlimited number of people without incurring a gift tax. Transfers to any one person above $14,000 is considered a “taxable gift.”
    • Do you owe taxes if you give someone over $14,000? No. You need to file a gift tax return only. Nothing is owed unless you exceed the “lifetime gift amount.”
  • Lifetime Gift Amount: The lifetime gift amount is $5 million. In 2013, individuals can give up to $5.25 million total (exemption amount is indexed annually for inflation) during their lifetime (above the $14,000 annual exclusion gift amount) without incurring a gift tax. Lifetime gifts above $5.25 million trigger a gift tax at 40%.

Case Example

You make the following transfers of your separate property in 2013 as part of your estate planning strategy: $3 million to your wife; $50,000 to your son; $25,000 to your daughter; $13,000 to your niece; and $14,000 to nephew.

  • The gifts to your niece and nephew don’t exceed the annual exclusion. They aren’t reportable or taxable.
  • The other 3 transfers exceed the annual exclusion so they need to be reported and are taxed as follows.
    • $2,986,000 to your wife ($3 million – $14,000). The gift to your wife is excluded from tax no matter what the amount. Ah, the benefits of marriage.
    • $11,000 to your daughter ($25,000 – $14,000)
    • $22,000 to your son ($50,000 – $28,000). The gift can be split with your spouse (up to $28,000). You would report $22,000 to IRS. This amount is counted against lifetime gift amount of $5.25 million. No tax due.
    • Total lifetime taxable gift amount = $33,000 (counted against total estate tax federal exemption amount of $5.25 million on death).

Remember that once the entire lifetime gift amount is used, any future transfers of more than $14,000 in a year to any one person will trigger a gift tax. It’s also important to note that recipients don’t usually get taxed. As always, there are exceptions and nuances so it’s best to consult a professional before implementing your estate planing strategy.

It is mandatory to report gifts of real property to the government even if no tax is due. The IRS is vigilant about monitoring real property transfers so you need to comply with the rules as part of your estate planning strategy. For example, parents gift a child a home worth $500,000. This exceeds the $28,000 yearly gift amount for married couples. No tax is due because it does not exceed the lifetime exclusion amount. However, it needs to be reported.

Special Estate Planning Strategy Tactics & Gifting Concerns

Estate planning strategy that employs gifting is closely watched by Uncle SamGift tax law and federal estate taxes are intertwined. An estate planning strategy commonly employed by larger estates uses lifetime gifting (up to $10,500,000 for married couples) to children or other ultimate recipients of the estate to drain the estate so there will be less estate taxes due on death of the giver. Nothing is for free. Any lifetime giving reduces your federal estate exemption dollar-for dollar. The fiscal cliff, which had an enormous impact on any existing estate planning strategy, has kept the federal estate tax exemption level at $5,250,000 for individuals and $10,500,000 for married couples. This means that you can leave this amount of money to loved ones without incurring estate taxes on death. By giving $900,000 during your lifetime your estate exemption will be reduced from $5.25 million to $4.35 million. Calling Donald Trump and Mr. Gates! Worrying about this estate planning strategy seems like something only for the rich. However, there are other clever ways that anyone can capitalize on lifetime giving.

Shift Income Brackets

Giving assets to a child (or other beneficiary) when you’re in a higher tax-bracket helps to shift taxes to the child paying at a lower rate. Assume a married couple has taxable income (exclusive of qualified dividends and capital gains) of $170,000. This puts them in the 15% tax bracket for long-term capital gains. Their only child, Kieran, fresh out of college earns under $35,000/year putting him in the 5% bracket for long term capital gains. If the married couple gives Kieran an appreciated asset (like stock), the capital gain will be reduced by a third (15% to 5%). If Kieran later sells it, he’ll pay capital gains based on Mom and Dad’s original basis. Giving your kids a high-dividend yielding stock is an estate planning strategy used to avoid the feds and protect your kids now and in the future.

A word of caution here. There’s something called “kiddie taxes” or rules that limit the amount of earned income that can be shifted to a child under 19 or college students under 24. Time to talk to a a professional about your estate planning strategy.

Medical & Tuition

There is no estate planning strategy needed here. You may pay an unlimited amount of medical or educational expenses for another person if you give the money directly to the institutions where the expenses were incurred.




About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.

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