Gaining From Proper Giving
August 31, 2010If Congress does not act before January 1, 2011, one of the largest single tax increases in history will take place. The scheduled changes are sweeping and include not only increases in income tax rates but also the reinstatement of the estate tax. With proper and proactive planning, the tax benefits of prudently giving away wealth to worth causes or people may yield additional gains to your financial situation and the ultimate beneficiaries of your gifts, while limitng the “elective” beneficiary — the IRS.
Giving to Your Family
Transferring a portion of your wealth to family during your lifetime can help reduce both your current income tax liability and future estate tax bills. (Of course, the tax benefits are immaterial if transferring too much wealth, or too soon, could be detrimental to the next generation’s personal growth, maturity and values.) Now, let’s begin with estate taxes. Currently each taxpayer can gift up to $13,000 to another individual without using any of their lifetime gift tax exemption of $1 million per person. There is a unique tax planning opportunity in 2010 given the pending changes to the estate and gift tax rules. Beginning January 1, 2011 the top gift tax rate is set to jump from 35% to 55%, with an additoonal 5% surtax on gifts from $10 million. Making a taxable gift to a family member or other individual now (above your lifetime gift tax exemption of $1 million) is essentially prepaying the transfer taxes, but it could cost less than bequeathing the assets at death. For example, assume an individual with $10 million wishes to make a gift of $4 million to their heirs, above their lifetime gift exemption amount of $1.0 million. At a 35% gift tax rate, the gift tax liability would be approximately $1.4 million. On the other hand, if the individual left $4 million to their heirs at death (assuming projected 2011 estate tax limits), the estate tax liability would be approximately $2.2 million. Making a lifetime taxable gift would save $800,000 in taxes given this simplistic example. An extra benefit of lifetime giving is all the future growth in that asset takes place outside your estate, further limiting your estate tax exposure. There are a lot of factors to consider with this strategy and your estate attorney should be consulted.
There are income tax benefits of giving assets to family as well. By giving income producing assets, say dividend paying stocks, to the next generation, the family as a whole could benefit if the younger generation is in a lower tax bracket. Thus, less of the dividend income goes to the IRS.
Giving to Charity
Charitable giving can make a great impact on your income and estate tax bill, but also positively impacts society and the world in which we live. Given the low interest rate environment, one timely strategy to discuss with your estate attorney is a Charitable Lead Trust. Assets are gifted to a trust that makes an annual payment to charity for a specified time, or for your lifetime. The balance remaining at the end of the term goes to a designated beneficiary, typically your family. Depending on the structure, you may be able to take an immediate income tax deduction for a portion of the original contribution — a double benefit especially with the dual rising income and estate tax situation.
Next, given the pending income tax laws increases, it may make sense to defer end-of-year giving until January 2011 when tax rates may be higher. (If you have a balance in a donor advised fund and would like to benefit your charity of choice this year, distributing money out of your fund may be a good idea.) Discuss the timing of charitable gifts with your CPA, as the answer is dependent upon your particular income tax situation.
Conclusion
Especially in the dawn of impending higher taxes, families have important decisions to make on how to transfer their excess wealth. Ultimately each of your dollars will benefit someone — family, charity or the government. With proper planning, executing a startegy to accomplish your giving goals can yield positive outcomes to yourself, your family and your community, while limiting your “gifts” to the IRS.
