2016 Estate & Gift Tax Planning Ideas

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Here are useful year end tax planning from an estate and gift tax perspective. Discussed below are various strategies for gifts to children and grandchildren during 2016, while incurring little or no gift tax. Also, many of these techniques could reduce your overall income tax burden. Should you have any questions, or wish to implement an estate and gifting plan, please contact us.

Use of Applicable Exclusion Amount to Reduce Estate and Gift Tax

For 2016, the estate and gift tax exclusion amount — the amount a taxpayer may transfer without incurring estate or gift taxes — is inflation-adjusted to $5,340,000. The value of a person’s estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Further, through a so-called “portability” provision, if a spouse dies after 2010 without exhausting his or her estate and gift tax exclusion amount, the surviving spouse may be able to use the deceased spouse’s remaining exclusion amount.

Aside from being free from gift taxes, lifetime gifts of up to $5,340,000 could save estate taxes because they remove post-gift appreciation on, and possibly income from, the gifted assets from the transferor’s estate.

Note also that, for transfers that are deemed to “skip” a generation, the generation-skipping transfer (GST) tax exemption for 2014 is also inflation-adjusted to $5,340,000. However, unused GST exemption may not be used by a surviving spouse (in other words, the portability provision does not apply for GST tax purposes). Like the estate and gift tax rates, the rate used for calculating the GST tax is 40%.

As explained below, certain types of lifetime gifts do not reduce a taxpayer’s applicable exclusion amount and are not subject to gift tax.

Annual Gift Tax Exclusion

The most commonly used method for tax-free giving is the annual gift tax exclusion, which, for 2016, allows a person to give up to $14,000 to each donee  without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donors (family and non-family). Thus, if an individual makes $14,000 gifts to 10 donees, he or she may exclude $140,000 from tax. In addition, because spouses may combine their exemptions in a single gift from either spouse, married givers may double the amount of the exclusion to $28,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year.

The annual gift tax exclusion applies to gifts of any kind of property, as long as the gift is of a present, rather than a future, interest, although certain types of property may require an appraisal. Gifts of appreciated property also could result in income tax savings to the giver, because the recipient would pay the capital gains tax on any sale.

Tuition Payment Exclusion

In addition to the annual gift tax exclusion, a person may make tuition payments for any individual without incurring gift tax. Though the amount that may be excluded is not limited, all payments must be made directly to a qualifying educational institution for education or training purposes. The exclusion applies only to tuition. Thus, payments for room and board, books, required equipment, or related expenses are not excludible. Because there is no limit on the gift amount, its timing is less important than with the annual exclusion. Nevertheless, if a person has the choice of making either a tuition payment or an annual exclusion gift for a particular beneficiary, it usually is preferable to make the tuition payment, because he or she still could make an annual exclusion gift later in the year.

Section 529 College Savings Plans

Contributions to a college savings plan established according to section 529 of the Internal Revenue Code (529 plan) do not qualify for the exclusion for tuition payments, but are covered by the annual gift tax exclusion. A contribution to the plan also may entitle the contributor to a state income tax deduction. Thus, a contributor can reduce his or her own income taxes by funding 529 plans for children, grandchildren, etc., with funds that would have been used for college anyway.

Qualified distributions from a 529 plan may be used for a wide range of educational expenses, including tuition, fees, books, supplies, required equipment, and room and board, but not transportation costs. An added advantage of a gift to a 529 plan is that, generally, the income earned by plan contributions is tax-free, so long as it is used for educational purposes. Also, because the contributor may be the plan’s custodian, he or she can ensure that the beneficiary uses the account for educational purposes.

A special rule allows a contributor to utilize up to five annual gift tax exclusions simultaneously when funding a 529 plan. Thus, for 2014, he or she may fund the plan with up to $70,000 (5 x $14,000), then file an election with the IRS to spread this gift over five years (2014 through 2018) for gift tax purposes. By using five annual exclusions, the entire gift becomes gift-tax-free. However, the contributor must wait until 2019 to make another tax-free contribution to this plan.

Medical Payment Exclusion

Subject to limitations, a person may exclude from gift taxes all payments he or she makes directly to medical providers on behalf of another individual. The exclusion for medical payments also includes the payment of medical insurance premiums. Thus, paying a child or grandchild’s insurance premiums is an efficient means of making a tax-free gift that does not consume either the annual gift tax or the estate and lifetime gift tax exclusions. Further, the payor may claim an income tax deduction for a payment made for his or her spouse or dependent.

Gifts in Trust

A person may not wish to make outright gifts to children or grandchildren, due to the loss of control over how they use the gift. Gifts in trust allow the trust creator to determine when the beneficiaries receive the money and how it is used.

By observing special requirements, a trust creator can ensure that a gift in trust qualifies for the annual gift tax exclusion. Generally, the trust is drafted to provide the beneficiary with temporary withdrawal rights over the gift (usually for 30 days), such that the gift is considered a present interest rather than one vesting in the future. Although this arrangement presents a risk that the beneficiary could withdraw the gift from the trust for purposes not to the creator’s liking, the likelihood of the trust creator terminating any further gifts to the trust is usually sufficient to prevent such withdrawals. If you are interested in making a gift in trust, we can explore this option more thoroughly.

Charitable Gifts

Now is an excellent time to review charitable giving to ensure it is accomplished in the most tax-efficient manner. Charitable giving is a form of estate planning because a gift to charity never will be subject to estate or gift tax, and provides the giver with an immediate income tax deduction. If a person wishes to make a large gift, his or her circumstances must be reviewed to determine the gift’s impact on this tax year’s income tax liability and whether all or a portion of the gift should be deferred to a later tax year. If the gift is property and requires an appraisal (usually for gifts of property with a value in excess of $5,000, other than publicly traded stock), the process should be started as soon as possible to ensure a successful transfer.


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