NEWS AND RESOURCES

Financial Planning for July 1999

Smart Ways to Give to Your Family
You spend your life building wealth but it is possible to have too much of a good thing. At a certain point, you will accumulate more assets for the IRS than for your loved ones. If you die after 2005, you generally can pass only $1 million to succeeding generations, free of estate tax. Married couples will be able to pass $2 million, tax free. Over this amount, estate tax will kick in at a 41% rate and escalate to 55%. If you increase your net worth from $3 million to $4 million, $550,000 of the incremental $1 million will be lost to federal estate tax.

Even is your estate is modest now, it will most likely increase over the years due to:

Compounding. At a rate of 12%,
wealth doubles in six years and quadruples
in twelve years.

Opportunities. You may have access to
opportunities not available to the public.
If your new worth is $1 million - $2 million
today; you can expect it to increase to
$5 million - $10 million or possibly more
before you die. This means a huge estate
tax bill.

Discipline. To be successful, learn to
beat the averages and make long-term
investments.

Look to the future. Calculate how much
you need to live the rest of your life in
comfort. A financial professional can help
you project future spending, inflation, etc.


Giving:

Assets may be given outright to younger family members, however, there are advantages to making gifts in trust instead...

(a) Income tax savings. The trust becomes
another taxpayer so some taxable income
may be recognized by the trust, at low
rates.

(b) Estate tax savings. Assets given away to a
trust are not only out of your taxable
estate, they are out of your children's
taxable estate too. Remember, if your
grandchildren are named trust beneficiaries
or receive large gifts outright, you need
an estate planning specialists to avoid
the 55% generation-skipping tax.

(c) Protecting your assets. Assets transferred
to a trust generally will be transferred
out of reach of creditors. These assets
will be sheltered if you, your children,
or grandchildren are involved in a divorce
or other litigation.

(d) Trustees. The trustee has a fiduciary
responsibility to preserve the assets. You
can set the terms so that your decendents
will have enough to live comfortably. If
a long term trust is envisioned, an
institution will likely have to serve as
a trustee. Have a panel of "trust-protec-
tors" in case of disappointing performannce
by the current trustees.


Best ways to give:

(a) Annual gift tax exclusion. You can give up
to $10,000 worth of assets per year to each
of any number of recipients, tax free.
Married couples who agree to split the
gifts, this limit it $20,000.

(b) Unified estate and gift tax credit. You
are allowed to use your estate tax shelter-
the unified credit - in advance by making
lifetime gifts. Making lifetime gifts
removes not only the assets but also any
future appreciation on them from your
taxable estate. You can make gifts in
excess of the above limit, but you must pay
gift tax. The Tax Code actually favors
such taxable transfers.

(c) Retired parents as tax shelters. If
parents are in a lower tax bracket than
you, making gifts to them of income-paying
securities, such as dividend-paying stock,
that have appreciated in value or are
expected to. Income received by your
parents will be taxed at a lower rate.
When you inherit the securities back from
your parents, the securities will receive
stepped-up basis and all taxable gain on
them will be eliminated. Make tax-free
transfers to parents using the annual gift
tax exclusion or your personal gift and
estate tax exempt amount. Non-income tax
consideration may apply.


What the rules are concerning students.
The IRS has their own definition of what a student is. They consider a student to be someone under the age of 24 and is enrolled full-time for five calendar months during the year. The IRS uses registration rather then attendance to define a "full-time student", so a dependency exemption is allowed. Remember, a parent can't claim a dependency exemption for a child over the age of 18 who has more than $2,750 of income in 1999 unless the child is a full-time student in which case the age is 24 years old.

Divorce.
If a former spouse promises to pay all the taxes incurred on joint returns filed during their marriage, this does not relieve the other spouse from liability to the IRS for the taxes. The IRS is not a party to that agreement and remains able to collect all the taxes due on the joint returns from either spouse.


Gifts are great if you understand the rules. Don't get caught with a surprise gift from the IRS in the form of a big tax bill when a little knowledge can help keep this amount to a minimum.

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