Financial Planning for December 2007
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Last Minute Gift Giving Ideas
In case you haven’t noticed, we are once again into the season of giving. Yes, that’s right - the holidays are upon us - and just about everyone is in a generous mood. With all this good will going around, why not take advantage of this time to do some estate planning?
As we come to year’s end, many clients are asking how they can best position themselves for the future, especially if they have a significant estate. This article will look at a few strategies you can use to avoid federal estate taxes, but first let’s address the issue of whether there will even be a tax to concern yourself with. In simplistic terms, the answer is yes, there will be some level of estate tax. Though not the largest part of the government’s income, it still provides a fair amount of money.
You have probably heard that the estate tax goes away in 2010. The only problem with relying on its elimination is that you must die in 2010 to guarantee no federal estate tax! In 2011, the tax will revert to pre-2002 levels. Right now, however, if you die in 2008, the federal Unified Credit (against estate tax) will shelter $2.0 million of your estate from taxation. That amount will increase to $3.0 million in 2009.
You may think those numbers are high enough that you couldn’t possibly meet the thresholds. That may be true, but for those who have faithfully invested over the years - or who may own a family farm - those magic numbers might not be too hard to reach. If you think you might fall into the taxable category, there are a few things you can do now to mitigate the negative effects of estate taxes.
Start an annual gifting program
One day, when Congress was in a generous mood, it enacted legislation that allows you to give away up to $12,000 per recipient per year. If you have a large estate, that may not sound like much to you, but that limit could be doubled if both spouses are alive and choose to split gifts. Also, you can give that money to anyone and are not limited to just your descendants or relatives. You can give the gift to anyone whom you would like to benefit from it.
Let’s say, for instance, that you and your spouse have a combined estate of $7.5 million. If you live in a community property state and die today, your estate would be $3.75 million. Of that, $2 million would carry no estate tax and you would only owe tax on the remaining $1.75 million. You could just give that portion to your spouse to be sheltered from taxes until his or her death - or you could at least start gifting some of that money.
If we assume you have 3 children and each child has 2 other children, you could conceivably retrieve $216,000 out of your estate each year (3 children plus 6 grandchildren multiplied by 12,000 for each donor spouse). You could also gift money to your children’s spouses, if you wished. Assuming no growth, it shouldn’t take you too long to whittle away at your estate.
If you choose to go this route, you should also maximize its benefits by making a gift before December 31, 2007 and one again early in 2008.
Crummy Trusts
One of the bad things about making gifts to reduce your estate is that you must give a gift of a “present interest.” Put simply, the person to whom the gift is being given must receive it with no strings attached. For example, if you give your child a check for $12,000 and tell them to spend it any way they want, then you have given a gift of a present interest. If, however, you put that $12,000 in a trust they can’t get to until age 25, you have not given a present interest, only a promise that they’ll receive the money in the future. This would not serve to get the assets out of your estate.
This presented a real problem to a lot of parents who had spendthrift kids. While they wanted to reduce their estates and provide for their children, they were reluctant to give away money that would most likely not be spent wisely. To get around this, a trust was created that included what are now known as “Crummy” provisions. Without going into detail, such trusts give the beneficiaries a right to withdraw funds. If the beneficiary fails to exercise that right, the funds become part of the trust and can’t be accessed until a time set forth in the trust instrument. The ability to withdraw the funds converts what would have been a future interest into the equivalent of a present interest.
You might wisely point out that giving the beneficiary the right to withdraw funds is tantamount to just throwing the money away. While there is some truth to that, the donor always has the right to fail to fund the trust of anyone who actually exercises the withdrawal right against the donor’s wishes. The bottom line, therefore, is the beneficiary has to follow your rules if they want to keep receiving an annual deposit.
Once again, to fully avail yourself of the benefits of using a trust to provide for heirs without paying gift taxes, you need to start your program before year end.
Conclusions
Christmas gifts aren’t the only types of gifts you should be considering during this holiday season. If you are trying to reduce your estate to avoid future taxes on it, this is the month to begin an annual gifting program. Give us a call and let’s discuss your alternatives.
Happy Holidays!
As we come to year’s end, many clients are asking how they can best position themselves for the future, especially if they have a significant estate. This article will look at a few strategies you can use to avoid federal estate taxes, but first let’s address the issue of whether there will even be a tax to concern yourself with. In simplistic terms, the answer is yes, there will be some level of estate tax. Though not the largest part of the government’s income, it still provides a fair amount of money.
You have probably heard that the estate tax goes away in 2010. The only problem with relying on its elimination is that you must die in 2010 to guarantee no federal estate tax! In 2011, the tax will revert to pre-2002 levels. Right now, however, if you die in 2008, the federal Unified Credit (against estate tax) will shelter $2.0 million of your estate from taxation. That amount will increase to $3.0 million in 2009.
You may think those numbers are high enough that you couldn’t possibly meet the thresholds. That may be true, but for those who have faithfully invested over the years - or who may own a family farm - those magic numbers might not be too hard to reach. If you think you might fall into the taxable category, there are a few things you can do now to mitigate the negative effects of estate taxes.
Start an annual gifting program
One day, when Congress was in a generous mood, it enacted legislation that allows you to give away up to $12,000 per recipient per year. If you have a large estate, that may not sound like much to you, but that limit could be doubled if both spouses are alive and choose to split gifts. Also, you can give that money to anyone and are not limited to just your descendants or relatives. You can give the gift to anyone whom you would like to benefit from it.
Let’s say, for instance, that you and your spouse have a combined estate of $7.5 million. If you live in a community property state and die today, your estate would be $3.75 million. Of that, $2 million would carry no estate tax and you would only owe tax on the remaining $1.75 million. You could just give that portion to your spouse to be sheltered from taxes until his or her death - or you could at least start gifting some of that money.
If we assume you have 3 children and each child has 2 other children, you could conceivably retrieve $216,000 out of your estate each year (3 children plus 6 grandchildren multiplied by 12,000 for each donor spouse). You could also gift money to your children’s spouses, if you wished. Assuming no growth, it shouldn’t take you too long to whittle away at your estate.
If you choose to go this route, you should also maximize its benefits by making a gift before December 31, 2007 and one again early in 2008.
Crummy Trusts
One of the bad things about making gifts to reduce your estate is that you must give a gift of a “present interest.” Put simply, the person to whom the gift is being given must receive it with no strings attached. For example, if you give your child a check for $12,000 and tell them to spend it any way they want, then you have given a gift of a present interest. If, however, you put that $12,000 in a trust they can’t get to until age 25, you have not given a present interest, only a promise that they’ll receive the money in the future. This would not serve to get the assets out of your estate.
This presented a real problem to a lot of parents who had spendthrift kids. While they wanted to reduce their estates and provide for their children, they were reluctant to give away money that would most likely not be spent wisely. To get around this, a trust was created that included what are now known as “Crummy” provisions. Without going into detail, such trusts give the beneficiaries a right to withdraw funds. If the beneficiary fails to exercise that right, the funds become part of the trust and can’t be accessed until a time set forth in the trust instrument. The ability to withdraw the funds converts what would have been a future interest into the equivalent of a present interest.
You might wisely point out that giving the beneficiary the right to withdraw funds is tantamount to just throwing the money away. While there is some truth to that, the donor always has the right to fail to fund the trust of anyone who actually exercises the withdrawal right against the donor’s wishes. The bottom line, therefore, is the beneficiary has to follow your rules if they want to keep receiving an annual deposit.
Once again, to fully avail yourself of the benefits of using a trust to provide for heirs without paying gift taxes, you need to start your program before year end.
Conclusions
Christmas gifts aren’t the only types of gifts you should be considering during this holiday season. If you are trying to reduce your estate to avoid future taxes on it, this is the month to begin an annual gifting program. Give us a call and let’s discuss your alternatives.
Happy Holidays!
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