Opportunities of Giving to your Family

As published in The Naperville Sun – November 16, 2008

The economy is in a temporary mess with home prices diminishing and the stock and bond market falling.  Yet, for anyone with a federal estate tax issue potentially at his or her death, this is a good time to give as many assets as one can.  This is one of the best opportunities to transfer wealth to younger generations, without incurring the federal estate tax in the process.

The federal system for estates and gifts is a combined system.  A person is able to give an annual gift of $12,000 per donee (or $24,000 if that person’s spouse shares the gift).  If the value of the gift exceeds the $12,000 amount, the portion above that amount uses up part of the lifetime exemption amount.

Back in 2001, Congress had changed the law in this area which increased the amount that an individual could leave to someone other than their spouse without incurring the federal estate taxes.  This amount is $2 million today, which is scheduled to increase to $3.5 million in 2009.  The federal estate tax, according to the 2001 law, is scheduled to disappear in 2010 (estates will not receive the stepped up basis of fair market value as of date of death and thus pay capital gains taxes instead), and will reappear in 2011 with a $1.0 million amount. There is also one additional rule in which you cannot give more than $1.0 million during your lifetime without incurring a tax on the gift.

This is the current state of the law, which will be changed by the new Congress when they are sworn in next year.  During the political campaign, both candidates stated that they wished to leave this lifetime exemption at a higher amount than $1.0 million.  President-elect Barack Obama stated that he wished to make the lifetime exemption at $3.5 million and leave the tax rate at the current rate of 45%.

As no tax professionals believe that the federal estate tax system will be abolished anytime soon, most planning involves the transfer or gift of property from one generation to the next with the least tax cost.  Due to the temporary diminished prices on stocks, bonds and real estate, this is a great time to consider making gifts of those assets, which will allow the recipient of the gift to enjoy the rebound in price when it occurs.

If you have stocks or mutual funds that have taken a beating in the marketplace, consider giving those to your family members in lieu of cash.  Due to the depressed value of these items, you can give more of these shares in 2008 to your heirs than you could have even a year ago.

Another thing that you can do is to pay the tuition and medical bills for your children or grandchildren with no tax consequences to federal gift or estate taxes.  If your grandchild is attending a private school, you can pay the tuition directly to the school.  If there are special doctor visits, you can pay these costs, net of insurance reimbursement, if any, directly.

In addition, as the interest rates are down now, this makes many other techniques in giving more to your heirs much more attractive.  It is more appealing now to use family loans, grantor retained annuity trusts, an intentionally defective grantor trust or a charitable lead trust, which will allow you to give more to your heirs than you would have been able to when rates were higher.  These tax techniques rely upon an interest rate that the government sets monthly, called the Applicable Federal Rate, which is set lower than the rates that you might see for a 30 year mortgage.

Because of the above, there are great opportunities now to transfer your wealth to the next generation.  If you are one of the people who may otherwise have to pay federal estate taxes at your death, consider contacting your estate planning attorney now to determine your best course of action to limit your exposure to this tax.