September 2014

The Benefits of Gifting

For many of our clients, a long-term gifting program makes sense. The alternative, of course, is to wait and transfer all of your property only upon your death. It's worth considering that giving property to the next generation during your lifetime has both tax and non-tax benefits.

Currently, with exemption amounts exceeding $5 Million per person, most people do not have an urgent tax savings' motivation. However, it is important to note that the tax savings value of the gifting program would be apparent at death. At that time, your property is likely to be worth more and it's entirely possible that the amount exempted from taxes will be less.

Aside from tax savings, our clients see at least 2 other major benefits to gifting. First, it's a lot more satisfying to watch your kids or other loved ones enjoy the gift, rather than waiting until after you pass away. Second, many gifts are made in a trust or other arrangement that causes them to be protected, for example, in the case of a divorce or business setback. This can mean greater financial security for your children and grandchildren than would be true in the case of an outright inheritance of your property.

Here are some guides for gifting:

1. You can pay tuition bills directly to a school for the benefit of children and grandchildren. These are not treated as gifts for federal gift tax purposes, as long as they are paid directly to the educational institution. Healthcare costs qualify for similar treatment.

2. Make gifts that take advantage of your gift tax annual donee exclusion, currently $14,000.

3. Double the benefit of this annual donee exclusion by having your spouse join in these gifts.

4. Some gifts can be valued with a discount (e.g., stock in a closely-held company) and this means a larger gift that still fits within the annual donee exclusion and/or unified credit exclusion amount.

5. Make gifts of highly appreciated capital gains property. The tax basis of the gifted property will transfer to the donee. This can save tax dollars if the donee can sell the property and a lesser capital gains tax rate will be applicable.

If gifts are made of property that is difficult to value, you can reduce the chances of a dispute with the IRS by filing a gift tax return to report these gifts.