Whether helping the kids with a down payment on their first home, paying the premiums on a life insurance policy in an irrevocable trust, or moving appreciated assets to a younger generation, annual gifting will touch the lives of millions of Americans. But before the transfer is made, an investor should spend some time looking at the investment and the tax ramifications of the property to be passed.
Much of the gifting itself will be done under the Annual Gift Tax Exclusion, a method that alleviates both a gift tax and the need to report the transfer. This exclusion applies to gifts only between individuals. Gifts made to charities and other organizations fall under a completely different set of rules.
The transfer is not deductible by the donor nor is it taxable to the recipient. Currently (in calendar year 2005), the annual exclusion is set at $11,000. In the future, this can be adjusted for inflation, but only in $1,000 increments. Spouses can increase their gifts to others to a maximum of $22,000 and, finally, gifts between spouses, like love, knows no limits.
Most transfers are done for one of two reasons. In the past, passing along property to diminish the value of an estate and, therefore, estate taxes was a major consideration in estate planning. This is still used extensively for larger estates but, under current law, fewer estates are subject to the tax. If the estate has no tax exposure (and if nursing care is taken care of), many advisors recommend not to gift at all but, instead, toallow the assets to receive a "stepped up" tax basis upon death.
Gifting to allow for current use of assets has been and continues to be popular. Often a parent wants to see a child use the gift immediately in order to enjoy an extended vacation or to make a major purchase. Here, it is expected that any gift of securities will be converted into cash with the appropriate tax paid.
Both donors and recipients should be aware that various gifts for educational or medical purposes may not reduce the annual exclusion. You should check with your tax advisor to determine whether this applies to a your specific situation.
Certain kinds of property (real estate, art, collectibles, closely held business interests, etc) should be appraised before a transfer is made. Consulting an expert in the particular field is usually a good idea to calculate the fair market value of the property.
Another circumstance requiring professional help is when "spending down" an estate for Medicaid purposes. An elder law attorney should be consulted for help in this area.
The actual gift of marketable securities or cash is fairly straightforward. Giving a check to someone or journaling over securities is enough to complete the gift. However, before making the gift, you should understand some of the potential tax considerations.
Let's first look at stock that has appreciated in value. Remember, whatever tax basis the donor in the gifted property will become the recipient's tax basis. If the donor is in a higher tax bracket than the recipient, it is often wise to gift the stock to the recipient and let the recipient sell the stock at his or her lower tax bracket.
If the fair market value of the stock is below the donor's original cost, then the donee must use the fair market value of the property as of the date of the gift in determining his or her tax basis. If you find yourself in this situation, the donor should consider selling the asset and then gifting the cash proceeds to the recipient.
Obviously, there will be times when a gift needs to be made regardless of the consequences; but, when time allows, you should do your homework to see what works to your best advantage.
Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.
If you have any questions or comments, Chip would love to hear from you. You may contact him by email at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network's web site at dahlkefinancial@sbcglobal.net
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
At the present time a company incorporated in the Isle... Read More
If you paid someone to care for a child so... Read More
Media reporting of a new EU savings tax directive has... Read More
Let's assume that you would like to begin saving for... Read More
If you have employees, you are responsible for paying a... Read More
Hit a big one? With more and more gambling establishments,... Read More
As a small business owner or self-employed person, one of... Read More
Reservists called to active duty and enlistees in the armed... Read More
Marketing is a necessary expense in running practically any business... Read More
The powers of Congress, and the limitations set upon those... Read More
Many taxpayers are confused about how long they should keep... Read More
Import duties continue to be significant elements in the cost... Read More
To tax or not to tax - this question could... Read More
As a small business owner, it's wise to familiarize yourself... Read More
Tilting the Tax Laws in Your Favor.In order to accelerate... Read More
Are you in the middle of a disagreement with the... Read More
So, you were pleasantly surprised to learn that you are... Read More
Running a home based business reaps many wonderful tax deductions... Read More
Whether helping the kids with a down payment on their... Read More
Anyone who is closely related to an accountant knows that... Read More
Over 50% of marriages end in divorce in the United... Read More
One can never underestimate the enthusiasm that politicians have for... Read More
The IRS has obtained civil injunctions against more than 100... Read More
As we enter mid-March, taxpayers begin to become very interested... Read More
Millions of people file tax return extensions every year. The... Read More
As an employer, you must pay employment taxes if you... Read More
If your like many, you don't always understand what people... Read More
Following is a reproduction of the IRS's rules and requirements... Read More
Just image, you are a small manufacturing company, business has... Read More
In the rush to get tax returns prepared and filed... Read More
We all love to criticize the IRS, don't we? And... Read More
The U.S. Department of Agriculture estimates that it costs nearly... Read More
"What we've got here is a failure to communicate." ... Read More
In trying to comply with tax laws for your e-business,... Read More
The Internal Revenue Service is reporting that the difference between... Read More
"Depreciation." For business owners, this word is the one most... Read More
The knock on the door from a Tax Inspector is... Read More
The United States is a nation of entrepreneurs. There are... Read More
Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More
Ever wish that, as a business owner, you knew exactly... Read More
Recently, I stumbled across a concept that could change your... Read More
While accountants are reaching for aspirin, millions of Americans are... Read More
It's that time again, the April 15 tax deadline is... Read More
Deducting Your Auto ExpensesAuto deductions are a very complex topic.... Read More
Many small businesses complain when confronted with the expense of... Read More
Knock-Knock-KnockWho's there?The IRS!The next quarterly payment of estimated income tax... Read More
Your days as an entrepreneur and businessperson are consumed with... Read More
In a past article I relayed the plight of the... Read More
Excerpted from the new book, "How to Do Space Age... Read More
How about a Tax Tip?As we all know Taxes are... Read More
Tax |