Great Gift Ideas
Interested in passing a portion of your wealth to your heirs or favorite charity? Gifting assets today may be a great way to reduce both our current tax bill and potential estate taxes. Here are some tax-saving strategies for gifting to children, grandchildren and charitable organizations.
Gifting to children and grandchildren
Current tax law allows you to give up to $11,000 gift indexed for inflation to pass assets to children, you may be able to transfer assets to heirs and have the income generated from the assets taxed at the child’s lower tax rate. In fact, a child claimed as a dependent (who does not work) can earn up to $700 investment income without incurring a tax liability.
Gifting appreciated property offers additional tax benefits because the potential tax liability on the capital gain is transferred to the child. Assuming the child is in a lower tax bracket, the tax liability on the capital gain upon sale by the child may be lower than your tax liability had you sold the shares. In addition, all income earned on the property after the transfer, as well as future appreciation, is also taxable to the child.
Strategies for Gifting to Minor Children and Grandchildren• Establish UGMA/UTMA accounts for your minor children or grandchildren and contribute $11,000 gift indexed for inflation to each ($22,000 for married couples). UGMA (Uniform Gifts to Minors Act and/or UTMA (Uniform Transfers to Minors Act) accounts are often used to shift income to children who are in a lower income-tax bracket. These accounts may also allow you to maintain some control over the assets until the child reaches the age of majority.• Consider setting aside funds for your children’s or grandchildren’s education needs in a (Internal Revenue Code) IRC 529 College Investing Plan. These college investing plans are ideal for transferring wealth to heirs, deferring taxes and saving for education costs. Married couples generally can contribute up to $100,000 in one year ($50,000 for single taxpayers) without gift-tax consequences (provided no more gifts are made to the beneficiary for five-year period). As a result, 529 plans give parents and grandparents the ability to gift large amounts (at one time) that will reduce the size of their estates.
Unlike IRAs, gifting to a 529 plan must be done by the end of the year. The earnings grow tax-deferred for federal income-tax purposes. Qualified distributions can be used for tuition, room. Board, books and supplies at nearly any accredited post-secondary school in the U.S. (including community and four-year colleges, graduate schools and technical colleges).
Accounts can be opened for children, grandchildren, nieces, nephews and family friends. If used in this way, any earnings (of the child for whose benefit the account was established) will be taxed at the child’s rate.
Strategies for Gifting to Adult Children• Establish an Irrevocable Life Insurance Trust and name each of your adult children as beneficiaries. An Irrevocable Life Insurance Trust (ILIT) allows you to move assets out of your taxable estate, reduce your current income-tax liability, and provide a source of funds to cover future estate expenses. BY naming your children as beneficiaries of the trust and provided the trust is properly established and administered, you can gift $11,000 gift indexed for inflation per child to the trust by using the gift-tax exclusion. For example, a married couple with three children could gift up to $60,000 per year to the trust. You then can use the gifts to pay the premiums o a life insurance policy that pays out to your heirs, through the trust, upon you death.
Gifting to charities
You may be eligible for certain tax benefits if you make a gift to charity. Gifts of property to charity may help you avoid the tax liability on unrealized gains and provide you with an income-tax deduction for the fair-market value of the property (if the property has been held longer than one year).
Strategies for Making Charitable Gifts • Make Outright Gifts to Charity. Typically, you can deduct the value of gifts to charity from your income. If you itemize, you can generally deduct up to 30% of your adjusted gross income for gifts of long-term securities and property-the limit is raised to 50% for cash contributions. Any contribution above the limit is subject to a five-year carry-forward period during which it can be deducted.
If you have securities with an unrealized capital loss, you probably do not want to donate the securities because the loss cannot be deducted. It is more beneficial to sell the securities, use the loss for tax purposes and then donated the proceeds. This technique results in a charitable-contribution deduction for the proceeds from the sale and a deductible capital loss for the individual.
• Establish a Charitable Remainder Trust.Consider establishing a charitable remainder trust. With this type of trust you can:
Retain the income from the property you gift to the trust for as long as you live or a set number of years, andReceive an income-tax deduction for the part of the value of the assets contributed.The property passes to named charity at the termination of the trust. • Establish a Charitable Lead Trust.A charitable lead trust may offer great benefits if you wish the charity to receive contributions over the nest few years and then pass property on to family members. A lead trust allows you to have income from assets paid to a charity without transferring ownership of the assets to the charity. In establishing a charitable lead trust, you effectively freeze the value of these assets for gift- and estate-tax purposes. Depending on the way the trust is structured, you may also receive a current income tax deduction.
Gifting to children and grandchildren
Current tax law allows you to give up to $11,000 gift indexed for inflation to pass assets to children, you may be able to transfer assets to heirs and have the income generated from the assets taxed at the child’s lower tax rate. In fact, a child claimed as a dependent (who does not work) can earn up to $700 investment income without incurring a tax liability.
Gifting appreciated property offers additional tax benefits because the potential tax liability on the capital gain is transferred to the child. Assuming the child is in a lower tax bracket, the tax liability on the capital gain upon sale by the child may be lower than your tax liability had you sold the shares. In addition, all income earned on the property after the transfer, as well as future appreciation, is also taxable to the child.
Strategies for Gifting to Minor Children and Grandchildren• Establish UGMA/UTMA accounts for your minor children or grandchildren and contribute $11,000 gift indexed for inflation to each ($22,000 for married couples). UGMA (Uniform Gifts to Minors Act and/or UTMA (Uniform Transfers to Minors Act) accounts are often used to shift income to children who are in a lower income-tax bracket. These accounts may also allow you to maintain some control over the assets until the child reaches the age of majority.• Consider setting aside funds for your children’s or grandchildren’s education needs in a (Internal Revenue Code) IRC 529 College Investing Plan. These college investing plans are ideal for transferring wealth to heirs, deferring taxes and saving for education costs. Married couples generally can contribute up to $100,000 in one year ($50,000 for single taxpayers) without gift-tax consequences (provided no more gifts are made to the beneficiary for five-year period). As a result, 529 plans give parents and grandparents the ability to gift large amounts (at one time) that will reduce the size of their estates.
Unlike IRAs, gifting to a 529 plan must be done by the end of the year. The earnings grow tax-deferred for federal income-tax purposes. Qualified distributions can be used for tuition, room. Board, books and supplies at nearly any accredited post-secondary school in the U.S. (including community and four-year colleges, graduate schools and technical colleges).
Accounts can be opened for children, grandchildren, nieces, nephews and family friends. If used in this way, any earnings (of the child for whose benefit the account was established) will be taxed at the child’s rate.
Strategies for Gifting to Adult Children• Establish an Irrevocable Life Insurance Trust and name each of your adult children as beneficiaries. An Irrevocable Life Insurance Trust (ILIT) allows you to move assets out of your taxable estate, reduce your current income-tax liability, and provide a source of funds to cover future estate expenses. BY naming your children as beneficiaries of the trust and provided the trust is properly established and administered, you can gift $11,000 gift indexed for inflation per child to the trust by using the gift-tax exclusion. For example, a married couple with three children could gift up to $60,000 per year to the trust. You then can use the gifts to pay the premiums o a life insurance policy that pays out to your heirs, through the trust, upon you death.
Gifting to charities
You may be eligible for certain tax benefits if you make a gift to charity. Gifts of property to charity may help you avoid the tax liability on unrealized gains and provide you with an income-tax deduction for the fair-market value of the property (if the property has been held longer than one year).
Strategies for Making Charitable Gifts • Make Outright Gifts to Charity. Typically, you can deduct the value of gifts to charity from your income. If you itemize, you can generally deduct up to 30% of your adjusted gross income for gifts of long-term securities and property-the limit is raised to 50% for cash contributions. Any contribution above the limit is subject to a five-year carry-forward period during which it can be deducted.
If you have securities with an unrealized capital loss, you probably do not want to donate the securities because the loss cannot be deducted. It is more beneficial to sell the securities, use the loss for tax purposes and then donated the proceeds. This technique results in a charitable-contribution deduction for the proceeds from the sale and a deductible capital loss for the individual.
• Establish a Charitable Remainder Trust.Consider establishing a charitable remainder trust. With this type of trust you can:
Retain the income from the property you gift to the trust for as long as you live or a set number of years, andReceive an income-tax deduction for the part of the value of the assets contributed.The property passes to named charity at the termination of the trust. • Establish a Charitable Lead Trust.A charitable lead trust may offer great benefits if you wish the charity to receive contributions over the nest few years and then pass property on to family members. A lead trust allows you to have income from assets paid to a charity without transferring ownership of the assets to the charity. In establishing a charitable lead trust, you effectively freeze the value of these assets for gift- and estate-tax purposes. Depending on the way the trust is structured, you may also receive a current income tax deduction.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!