business builder money  

You can't take it with you,
so consider giving wealth now

by Carin Thomas  

As a successful business owner, your key assets, such as your business, home and other savings, are very important to you. With the uncertain future of today’s estate tax laws, the failure to plan ahead could significantly affect your estate. Many individuals feel the best way to ensure their assets are passed on efficiently is to transfer their wealth during their lifetime.

Transferring wealth during your lifetime can be one of the most important and rewarding estate planning processes you undertake. From a tax perspective, you can remove an asset and its future appreciation from your estate, providing a potentially substantial tax savings for your heirs. Moreover, you ensure your assets are allocated the way you want them. You decide to whom to give your assets, such as your children, grandchildren or charity, and when to transfer your assets.

Whenever and however you decide to transfer your wealth, you’ll experience the emotional benefits of watching your loved ones enjoy their inheritance during your lifetime.

If you’d like to transfer your wealth during your lifetime, consider the following strategies. 

Make annual gifts. You can give $11,000 to as many people as you'd like, with no limit to the total amount gifted, so long as no one person receives more than $11,000. Married couples can choose the option of “gift splitting,” which enables one spouse to make the entire gift, up to $22,000, provided the donor's spouse consents to applying his/her $11,000 annual exclusion to the gift. 

The total amount doesn’t have to be transferred in cash; rather, it can take the form of stock, real estate, and so on. These assets are usually tax-free and may not need to be reported to the IRS, except in the case of gift splitting, where you must file a gift tax return if the gift is from a single account. If you gift an asset besides cash, the asset’s original cost basis is transferred to the new owner (unless gifted to charity).

Take advantage of the lifetime gift tax exemption.  Each person has a lifetime gift tax exemption of $1 million. If you gift more than $11,000 to any one recipient, that $1 million exemption is reduced by the amount of the gift exceeding $11,000.  For example: You give your child a gift of $100,000 this year. The first $11,000 is covered by the annual exclusion. Although you don’t pay any gift taxes at the time of transfer, the $89,000 balance is applied against your lifetime exemption. This leaves you an available lifetime exclusion of $911,000 that can be applied to future gifts that exceed the $11,000 annual limit.

Many people overlook the benefits of gifting appreciating assets. One of my clients took advantage of the lifetime gift tax exemption by gifting some of his land to his children.  A few years later, the land doubled in value. Because he gifted an appreciating asset, his children could sell the land and the resultant capital gains tax was significantly lower than the potential estate taxes would have been if he kept the land in his gross estate until death. 

Contribute to medical and tuition bills. Paying for someone’s medical or tuition expenses — as long as you write the check directly to the health institution or school — is not considered a gift and therefore is tax exempt. Section 529 Qualified Tuition Plans allow married couples to take advantage of a special gift tax election and  contribute up to $110,000 per year ($55,000 for a single donor) to the plan without gift-tax consequences, provided no more gifts are made to the beneficiary for a five-year period. Assets in a 529 qualified tuition plan are earmarked for qualified higher education expenses, which include the tuition, room, board, books and supplies at most accredited U.S. colleges. 

Set up a trust. Certain types of trusts can be powerful tools for distributing wealth tax-free or with a minimal gift tax during your lifetime. Tax efficient transfers will benefit the grantor’s estate as well as the beneficiaries. By transferring assets into an irrevocable trust, you can remove the assets’ value and their future appreciation from your estate. If you pay gift tax, the amount of the tax also is removed from your estate.

Donate to charity.  You can donate an unlimited amount with reduced transfer tax or without incurring any estate or gift taxes if you give to a qualified charity. A Charitable Remainder Trust (CRT) enables you to benefit a charity in the future while the donor or another beneficiary receives current income.  A Charitable Lead Trust (CLT) provides a charity with income for a specified period of time before transferring trust assets to your designated beneficiaries or back to the grantor. 

Consider other trusts. Generation Skipping Transfer Tax Trust (GST).  A GST is designed for individuals with substantial assets who would like to use their GST tax exemption to bequeath up to $1 million ($2 million for married couples) to their grandchildren or great-grandchildren and skip the next generation (children). The tax is payable in addition to any estate or gift taxes. 

Another options is a Grantor Retained Annuity Trust (GRAT).  A GRAT enables you to transfer assets into a trust that has a fixed term (such as 10 years). During that period, the trust will pay out annuity payments at the fixed rate you choose at the time of trust creation. The IRS allows you to subtract the present value of the annuity payments from the amount transferred to determine the amount considered a taxable gift, a technique that can substantially reduce gift-tax liability.

If the assets in a GRAT appreciate more quickly than is assumed by the IRS in its rate tables, you will be able to transfer the appreciation outside the transfer tax system.  Any funds remaining in a GRAT when it terminates are distributed to “remainder beneficiaries” without further gift and estate tax consequences. The GRAT will only work to remove assets from your estate if you survive the trust term.

Transferring wealth during your lifetime is an important part of your estate planning process. If you want to consider these strategies, many of which are complex and subject to change, you should seek the advice of a professional financial adviser, tax adviser and attorney.

Carin Thomas