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With major changes to estate and gift tax rules on the horizon in 2013, affluent investors should consider taking action now to plan a financial legacy. Laws affecting estates and gifts are among many federal tax provisions set to expire at the end of this year. Without congressional action, 2013 may usher in a variety of new tax rates and exemption levels. As a result, right now may be the best time for individuals to take advantage of gifting strategies with the potential to maximize their legacy. An effective plan for transferring wealth among family members and heirs typically involves some form of gifting. Many think of gifting as something that is only triggered by death. But there are also strategies that allow individuals to pass along wealth during their lifetime through gifting.
Investor Education
limit will affect the calculation of the donors estate tax. Certain transfers are not considered gifts: Direct tuition or medical payments Transfers between spouses Annual transfers that do not exceed the maximum allowed For those wishing to make gifts toward higher education and contribute to a 529 savings plan, there are additional tax advantages. A donor may make five years worth of gifts at a maximum of $13,000 per year, for a total of $65,000. As long as the transfers per recipient do not exceed the $13,000 annual exclusion amount (or $26,000 for spousal gifts), the total amount is not affected by taxes.
What is gifting?
The Internal Revenue Service (IRS) defines a gift as the transfer of property any type of asset while receiving nothing or something less than full value in return. Gifting may be used for many reasons such as providing financial assistance to family members or others, reducing the value of an estate before death, or shifting income from one taxpayer to another.
2012: lifetime exemption amount 2013 and beyond:* lifetime exemption amount
$5,120,000 (maximum tax rate is 35%) $1,000,000 (maximum tax rate is 55%)
* Assumes expiration of Bush-era tax cuts after 2012 and no subsequent legislation.
$3,660,000 in appreciation of gift is out of the estate, resulting in a tax savings of more than $1,200,000!
$1,000,000 gift
1Assumes 8% annual growth rate. 2Based on a maximum estate tax rate of 35%.
For example, consider a current $1 million gift that has an 8% annual growth in the value of the asset over 20 years. The asset would increase to $4.66 million, an appreciation of more than $3.5 million on the original gift. Assuming a taxable estate liable to a maximum rate of 35%, the estate tax savings from removing future appreciation of more than $3.5 million from the estate by previous gifting would be more than $1.2 million. Given the current exemption level and tax rates, donors may also benefit from certain advanced planning strategies. These include valuation discounts using Family Limited Partnerships or certain trust strategies such as dynasty trusts or grantor trusts. Of course, while these strategies remain available today, there is a risk that legislative action may eliminate or restrict them in the future.
For example, consider a gift of $5 million executed when the gift tax exemption is $5 million. If the gift and estate tax exemption was only $1 million at death, the difference in the two amounts would be clawed back into the decedents estate. While this type of claw back provision is a risk, it does not mean that it will likely be implemented in the future.
of their income.* Income phaseouts on these types of deductions are scheduled to return in 2013. Additionally, there have been recent legislative proposals that would further limit the tax benefits of making charitable gifts. One example is to reduce the tax benefits for those in the highest brackets (currently taxpayers in the 33% and 35% brackets), meaning a charitable contribution deduction would be limited to not more than 28% of the amount of the contribution for those taxpayers. In an environment where the federal budget deficit is being heavily scrutinized, reducing these types of tax benefits is being seriously considered. As a result, investors may wish to accelerate charitable gifts into 2012 after consulting with their tax and legal advisors.
1Certain restrictions may apply if taxpayer is subject to the alternative minimum tax (AMT).
Help heirs while you are still living. Reduce estate assets now to avoid or minimize estate
taxes in the future.
Minimize income taxes now. The gifting of incomeproducing assets can shift the tax burden to family members in lower tax brackets.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions.
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