Start ‘gifting’ early to transfer your assets tax free
Whether you have inherited your wealth or worked hard to build it for yourself and future generations, you need to plan how it is eventually distributed.
Today, there are many options for distributing wealth according to your wishes while minimizing taxes.
Giving gifts -- or "gifting" -- remains one of the best and simplest estate-planning strategies. Gifting an asset not only removes it from your estate but also removes future appreciation and/or any annual earnings, resulting in a lower future estate tax.
One reminder, though: Any gift taxes are taxed to the person giving the gift, not the recipient.
The 2007 annual gift tax exclusion allows you to make tax-free gifts of up to $12,000 per person, to an unlimited number of recipients without using any of your $1 million lifetime exemption. The $12,000 limit is for the entire year, so if you give your child $10,000 during the year and another $2,000 for a Christmas present, you would have met your annual limit. If you are married, you and your spouse can give up to $24,000 per person per year by splitting gifts (your gifts are treated as if you each gave the maximum $12,000).
Gifts include money and property, including the use of property without expecting to receive something of equal value in return (such as rent free accommodations).
If you sell something at less than its value, make an interest-free or reduced-interest loan, or cancel a debt that someone owes you, these may also be considered a gift.
Gifts must be considered a "present interest," meaning that as a donor, you must relinquish all control over the property for the gift to be complete and qualify for the annual exclusion.
The value of the gift of the property transferred is its fair market value. The basis in the property transferred (after it is given to the beneficiary) is the original basis.
For example, if your house is worth $600,000, you could gift to your child a 2.5 percent interest ($600,000 x 2.5% = $12,000) to maximize the annual gift tax exclusion. If you bought your house for $100,000, the child's interest in the house would be $2,500.
If you and your child later sell your house for $600,000, he or she could recognize a gain of $9,500 (the proportion of the proceeds $12,000 less the $2,500 tax basis).
Gifts for education or medical purposes are not subject to the annual limits. If you have children or grandchildren in private school or college, consider making direct payments of tuition to their educational institutions. Your payments will be gift-tax free and not count against the annual exclusion of $12,000, your $1 million lifetime gift-tax exemption or be includable as income to the beneficiary of the gift.
Finally, gifts to your spouse, a charitable organization or political organization do not count against the annual gift-tax exclusion.
Starting a gifting program early means you can gradually transfer much of your estate free from gift and estate taxes. By gifting, you are able to give money now to friends or family and see their enjoyment.
For gifts to qualify for 2007, they must be made by the end of the year, so making a different kind of gift may be something worth considering this holiday season.
Mari Ishii is a senior tax associate in the Honolulu office of Grant Thornton LLP. She can be reached at Mari.Ishii@gt.com