Tax Article - Simple Estate Planning Through Gifting

Many of us tend to change the subject or say I can do it later when the subject of planning one's estate arises. Estate Planning can be a very complex undertaking. One relatively painless and straightforward estate planning technique that should be considered annually is making gifts. Those who have amassed wealth in excess of the current amount of property that can be transferred at death without paying Federal estate taxes ( currently $ 1,500,000 in 2004 ) should consider making annual exclusion gifts and gifts of direct payment tuition and medical costs. The marginal estate tax rate is 48% right now. Making these two types of gifts allows the transfer to avoid this burdensome tax completely on the value of the transfer AND any future appreciation the transferred property may enjoy. Some practical examples follow.

Example One: Parents are financially secure. Three children have recently graduated from college and are starting out in life in various occupations. Each needs some financial support. Parents use the annual exclusion gift approach and together give each child $22,000 in 2004 and 2005. Since each parent can gift up to $11,000 per child per year and exclude the amount from the gift tax, the parents have successfully removed $132,000 from their estates ( potentially a savings of $ 63,360 in estate taxes ).

Example Two: You are financially secure. A brother has experienced some financial setbacks and needs to pay his children's college tuition. You pay the college directly for the tuition charges of $20,000. You also provide the child with $11,000 to pay for room and board, fees and incidentals. The tuition payment, because it is made directly to the college, escapes gift tax and does not count against your annual exclusion amount of $11,000 for that student. The annual exclusion amount shields the additional $11,000 from the gift tax. In total, the potential estate tax savings are $14,880.

A couple of things to keep in mind are:

1) The gifts must be completed gifts - no strings attached

2) The donee does not pay income tax on the gift

3) You do not get a deduction for income tax purposes

4) Medical costs, like tuition, should be paid directly to the provider

We encourage you to contact us prior to making gifts to make sure the transaction is structured properly to achieve the maximum overall tax saving.

If you have any questions, please contact Feeley & Driscoll's Boston CPA team, Email us or call 1 (888) 875-9770.

related links