How do you feel when you receive a gift you really appreciate? Now how do you feel when you give a gift to someone who really appreciates it? The old adage, “‘tis better to give than to receive,” has been a timeless proverb throughout history for a reason: it’s true. As good as it feels to receive something we appreciate, it feels far better to give something to someone else who can appreciate it even more.

Did you know you can accomplish this by planning your estate? Would you rather give money to your favorite charity or require your beneficiaries to write a large check for your estate taxes (next year, the highest tax rate of any tax in the US) directly to the Department of Treasury?

An effective way to donate to charity as part of your estate plan is via a Charitable Remainder Trust. This is one of the most rewarding ways to make sure that your assets go to the charity of your choice rather than directly to the federal government; thereby, you’ve just allowed Congress to decide what to do with your money. In utilizing this estate planning techniques you can designate assets in trust to donate to charity while still receiving an income from the trust. Once you pass away everything remaining in the trust will go directly to the charity you chose when you first signed your trust.

The tax benefits of donating to charity can be substantial. You can significantly reduce (or in some cases even eliminate) estate, capital gains and income taxes. To find out more about these great tax advantages you should consult an attorney to pick the best option for you and the charitable institution(s) of your choice.

The assets you give to the charity will be removed from your taxable estate. For example, if you give your entire estate to a charity (or the entire amount of your estate over the estate tax exemption, which is unlimited this year but reverts down to $1 million in 2011), your estate will pay no estate taxes!

Additionally, there will be no capital gains tax when the assets are sold by the charity – it’s great for highly appreciated assets. This is another great benefit because if you pass along a rental property to your children worth $500,000 at the time of your death and your beneficiaries sell it for $600,000 they will be paying a capital gains tax [short-term (bought and sold within one year) or long-term (bought and sold over 1 year)] on $100,000, which is the amount of gain from the sale. For simplicity sake, let’s say the long-term capital gains tax applies; they would have to pay $15,000 in taxes as opposed to a charity which would pay nothing in taxes because qualified charities are tax exempt organizations (always a good idea to check with the IRS first to make sure the charitable organization of your choice is recognized as a tax exempt entity). And, if you donate publicly traded securities to a charity, you can get a charitable income tax deduction for their full fair market value - up to 30% of your adjusted gross income.

So you see it pays in many ways to give to charity: you control where the money you donate goes, lower (or even eliminate) potential estate tax liability on your estate, eliminate any potential capital gains tax liability and of course the satisfaction of helping a worthy cause. Ok, so the last one is purely sentimental, but hopefully now you are able see the tremendous benefits charitable contributions can have on your estate, your beneficiaries and the recipient organizations.

Often people will transfer title of their assets to their adult children while they are living, thinking it will make things easier for their children when something happens to them.  Doing this will prevent the court from controlling the assets if you become incapacitated and it will avoid probate when you die.  However, while there can be valid tax reasons to transfer some assets now, it can also create some serious problems.

Here’s the reality.  First, when you give away an asset, it’s gone. You may think your children will give it back to you if you change your mind, but they don’t have to and you can’t make them.  Also, we all know how family dynamics can drastically change when money is involved. They can do anything they want with the asset given to them: they could sell the asset against your wishes (e.g. a priceless family heirloom or jewelry with significant sentimental value). They could lose it to creditors or be influenced by a maliciously intentioned spouse (sorry, but they’re not a myth and have been know to exist in even the best of families).  If you outlive your children or they divorce, the ex-spouse could end up owning the asset and all of a sudden someone who you never intended to have it now owns your great grandmother’s one of a kind porcelain teapot collection.

Second, there could be tax problems with gifting to your kids. Currently, when you give someone other than your spouse more than $13,000 in one year, the gift tax may get involved.  That means if the gift has a value of more than $13,000, you must file a gift tax return and the IRS will be none too happy with you.  We all know how forgiving the IRS can be, so you may not need to worry about this failure to file.  Oh wait a second, I’m getting confused; it’s my mother who’s forgiving … not the IRS.  File the return.

One more big problem, when your children sell the asset, there will probably be a capital gains tax because, under current law, the asset would not receive a stepped-up basis.  The basis of an asset is the value used to determine gain or loss for income tax purposes; in other words, the basis is what you paid for the asset. If you give an appreciated asset to your children while you are living, it keeps your old basis (what you paid for it). However, if they receive it as an inheritance after you die, it receives a new stepped-up basis and is subsequently revalued as of the date of your death.  Not a fun topic to think about but let’s look at why you should pay attention.

Here’s an example.  Let’s say you purchased your home for $500,000 and it’s worth $1,000,000 when you die. If your children receive it as an inheritance after you die, the basis would be $1,000,000.  If they then sell it for $1,000,000 there would be no gain and thus no capital gains tax.

Part two of the example.  If you give the house to your kids while you are living, the basis would be $500,000 (what you paid for it). If they sold it for $1,000,000, they would have a $500,000 capital gain and would have to pay $75,000 in capital gains tax. Currently, the top capital gains rate on assets held longer than 12 months is 15%.  On one hand $0 and on the other $75,000 straight to the IRS.  Hmm, what to do?  What to do?

Substantial gifts may also disqualify you from receiving Medicaid and SSI (Supplemental Security Income) benefits for a significant period of time.  A good estate planning attorney can help ensure that your plan does not disqualify you from receiving these benefits through proper planning techniques.

Gifting can be a great way to reduce estate taxes if your estate is larger and you can afford to give away an asset.  Just remember to never give away an asset you may need later and make sure you consult with an experienced professional.  If you’ve still got question, give us a call at 858-384-5757 or check us out on the web at www.yourtotalestateplan.com.

Now that the Obama administration is in place, the uncertainty regarding the future of the federal estate tax may soon be resolved and that resolution almost certainly includes the estate tax being here to stay. If your estate exceeds the $3.5 million lifetime exclusion you need to be proactive and take steps that will minimize the impact of this tax on your estate or else your estate will be paying the government 45 cents for every dollar above $3.5 million. Certain strategies are particularly attractive when asset values have decreased and interest rates are low, as they are today.

One estate planning technique that can be very effective is the grantor retained annuity trust or GRAT. With this approach, you transfer investments, a business interest or other assets to an irrevocable trust. You then receive annuity payments from the trust for a specified period. At the end of that time, the assets remaining in the trust pass to your named trust beneficiaries. When you transfer assets to the GRAT, you are making a gift for tax purposes, however you are not taxed on the present value of the annuity interest since you are keeping those payments for yourself. Additionally you can use your lifetime gift-tax exclusion, currently $1 million, to avoid or reduce tax on the gift of the trust remainder.

Setting up a GRAT when interest rates are low results in a higher value being assigned to the annuity stream. That, in turn, results in a lower taxable gift of the remainder. An additional benefit occurs when asset values increase again because the future appreciation associated with the trust assets will not be subject to gift tax. As long as you survive the annuity term, the value of the assets you’ve transferred will not be included in your estate.

If you’re like me, you’d have to read that paragraph about 6 time to even comprehend what it means.  So let’s simplify: You take an asset, something you bought a long time ago for not a lot of money and today is worth a whole lot more than you got it for and put it into a special trust, the GRAT.   Now the point is that you want your beneficiaries to get it at some point in the future.  Well, we can give it to the GRAT, but the GRAT has to give you an income stream in return, the annuity.  At the end of the annuity term, the asset in the GRAT isn’t considered part of your estate and therefore not subject to the $3.5 million dollar exclusion.  Nice!

The easiest way to reduce your estate is to simply give pieces of it away.  The gifting strategy for reducing the value of your estate is to make gifts that are protected from tax by the gift-tax annual exclusion, currently $13,000 per recipient per year. Since many asset values have temporarily decreased, you should still look at the glass half-full because it enables you to give away more assets to loved ones on a tax-free basis. Another possibility you might consider is loaning your child money. You will have to charge interest at an IRS-prescribed rate, but that rate is currently low. And, to shrink your estate, you can forgive up to $13,000 of the loan each year, which is the extent of the gift-tax annual exclusion.

These are two of many ways to plan your estate in order to minimize the federal estate tax and prevent the federal government from taking 45% of everything you pass along to your loved ones that exceeds the $3.5 million lifetime exclusion.  To help avoid imposing such a significant tax burden on your family contact our office today (858-384-5757 or info@yourtotalestateplan.com) to schedule an appointment so we can discuss strategies that will work for your family.