Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

"MAKE GIFTS AS A FORM OF FINANCIAL PLANNING TO AVOID TAXES"
(1/28/01)

Many of our clients come to us with a problem all of us would like to have. They have too much money. Like most of us, they want to pass it all on to their children or grandchildren, rather than paying any of it to Uncle Sam.

No one knows for sure what the current political climate will deliver in the way of tax relief. Based on recent pronouncements by the President and the Chairman of the Federal Reserve, some cutting of taxes is to be expected. Whether the taxes that are cut or eliminated altogether will be estate taxes or something else is anyone's guess.

Based on my almost 27 years in the estate planning business, I'm going to assume that any tax relief that finally becomes law will phase in the reductions over a period of time. That is what has happened with every major revision to the tax code over the past three decades, so I think it is a fair guess something similar will occur this time.

Having said that, and unless I am completely out in left field with my prognostications, tax planning should still be a key factor for those of you with large estates.

"How Do I Avoid Paying Estate Taxes At My Death?"

One of the best ways to stay ahead of the estate tax game and reduce or avoid estate taxes altogether is to give away your property while you're still alive.

To maximize the tax benefit of any gifts you make, be sure to learn some basic rules.

"How Much Can I Give Away?"

That's a good question. First, you can give $10,000 a year to as many people as you want completely tax free. In addition, for 2001, every one of you can give away an additional $675,000 worth of property and assets tax free. This is sometimes called the "exempt amount" and was formerly known as the "unified credit." This tax free upper limit increases to $700,000 in 2002, $850,000 in 2004, $950,000 in 2005 and $1 million in 2006.

Finally, you can give as much as you want to your spouse or to qualified charities.

"Okay--this sounds good. What's the Catch?"

You're right. Uncle Sam never (or very rarely) gives us anything for free. The "catch" is that the federal gift and estate taxes are "unified". This means that if you give your daughter $30,000 this year, you have to file a federal gift tax return. Notice, I didn't say you have to pay taxes--just report the gift. The first $10,000 is totally tax free as I mentioned above. The remaining $20,000 gift reduces your "exempt amount" by an equal amount. Instead of being able to pass $675,000 tax-free to your heirs, now you can only leave or gift the remaining $655,000. If you make a number of such gifts, you can quickly whittle down your exempt amount to nothing. That may not be bad. It all depends on your total asset base and your estate planning goals.

If you and your spouse joined in the gift to your daughter, you could have given her $20,000 tax free, and only the remaining $10,000 would have been deducted from your exempt amount. As you can see, where possible it is normally better for both spouses to join in such gifts.

"What if I own property by myself and my spouse isn't a co-owner-- can we still make a joint gift?"

Excellent question. You must have attended one of our seminars. The answer is "yes." It doesn't matter who "owns" the property. So long as you and your spouse elect to claim it as a joint gift, you will qualify for the $20,000 annual exclusion.

"Are there any other tricky rules we need to know about?"

Now that you mention it, there is another one that might interest you. It's called the "Ed-med" tax break. In addition to the $10,000 or $20,000 annual gift tax exclusion mentioned above, you can also pay someone else's school tuition or medical bills without incurring any tax consequences. If you do this, though, be sure you make the payments directly to the school or health care provider, not to your "beneficiary."

If you have a significant taxable estate, you can significantly reduce or eliminate estate tax at your death by making regular annual gifts to your children, their spouses, your grandchildren, and other worthy beneficiaries.

"Wait a Minute--Didn't you say you were also going to tell me WHAT to gift?"

Good catch. I almost forgot. The key here is knowing the "basis" of your property. The rules really are pretty simple. When possible, give away property with a high basis and let your low basis property pass to your heirs through your will or trust.

The reason for this advice is simple. If you give your son something, he takes it with your existing basis. If you bought stock in Coca Cola at 35¢ a share and now it's trading at say $20 a share, your son will be staring at a huge capital gains tax when and if he has to sell it.

If, on the other hand, you leave him the stock in your will, he will take it at its "stepped up" basis of $20 a share. This way, he can avoid capital gains tax altogether.

Gifting can be a useful estate planning tool, but only in the hands of those who understand the applicable rules. Be sure to consult with an estate planning professional who can advise you how, what and when to make gifts--and how to document them to the IRS' satisfaction.

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