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Tis The Season for Holiday Gifting

With the holidays just around the corner, you might be feeling generous — and for estate planning purposes, now might be a good time to turn your generosity into tax savings. Holiday gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax.

Let’s start off with this basic premise: The assets in your estate can be sheltered from federal estate tax by the estate tax exemption. Effectively, the exemption covers assets of up to $2 million owned by a decedent. This figure is scheduled to increase to $3.5 million in 2009 before the federal estate tax is repealed in 2010. However, the estate tax will be revived in 2011 unless Congress amends the law between now and then.

Caution:  Don’t Overdo It

The IRS may step in if it thinks an arrangement is a bogus attempt to shift more money out of your taxable estate than allowed. And there has to be an actual gift where you don't maintain control over the assets.
For example, in one case, the Tax Court denied the exclusion when gifts of family business
stock were transferred to the spouses of the donor’s sons with the understanding that the stock would immediately be re-gifted to the sons.
According to the court: “The evidence shows the daughters-in-law were merely intermediate recipients, and that decedent intended to transfer the stock to her lineal descendants who were committed to continuing the operation” of the family business.(Estate of Marie A. Bies, TC Memo 2000-338)

In the meantime, you’re also entitled to a $1 million gift tax exemption for lifetime gifts. However, using the gift tax exemption erodes your effective estate tax shelter. This could saddle your family with a hefty estate tax bill in the future.

Here's Where the Annual Gift Tax Exclusion Comes In

Under a special provision in the tax code, you can give each recipient of your generosity up to $12,000 a year in cash or other assets without paying any gift tax.  (The annual exclusion was increased from $11,000 per recipient in 2005.)  This is above and beyond the amounts sheltered by the estate and gift tax exemptions.  In addition, the exclusion is doubled to $24,000 per year for joint gifts made by a married couple to a recipient.You don’t have to file a gift tax return to benefit from the annual gift tax exclusion, although your spouse must provide consent on a return for joint gifts. The benefit: Suppose you want to provide a boost to your grandchild’s future college costs. You can give the grandchild $12,000 this year without any gift tax consequences. This strategy can be repeated year after year. If you give gifts of the maximum $12,000 to, say, five different grandchildren for five years in a row, you will have reduced your estate by $300,000 — without filing any paperwork with the IRS.

Ways to Give More

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. As an example, you can pay $20,000 to your grandson's college for his tuition this year, plus still give him up to $12,000.

In addition, there’s a special way to use the annual exclusion for gifts to fund section 529 college savings plans for your children or grandchildren. These tax-saving plans help parents save for higher education. Under tax law, you can contribute up to $60,000 to a beneficiary’s 529 plan in one year ($120,000 if you contribute with your spouse). But in order to accomplish this, there are a number of rules you must follow so consult with your tax adviser if you are interested to ensure compliance.

Finally, remember that the gift tax exclusion applies on an annual basis. Therefore, you can give a family member up to $12,000 in late December and give the same person another $12,000 in early January. This technique may be used for several other recipients. By “doubling up” in this fashion, you can reduce your estate by a sizeable amount in just a few weeks.

As you can see, gifts made during your lifetime can make a great deal of tax-sense if your estate is large enough, compared with letting the assets be eaten away by estate tax. Still, not everyone is comfortable with the idea of giving away assets. You might be worried that you'll need them someday or you may feel your children aren't ready to manage the assets. Both are legitimate concerns. You may want to maintain your lifestyle years from now and not watch your children squander your savings.

Planned gift giving is not a do-it-yourself project. You worked hard to accumulate assets and you want to make sure they're managed properly. Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121 to help achieve the greatest savings while maximizing your wealth.