Sunday, March 15, 2009

Using Taxable Gifts To Shrink An Estate

The Wall Street Journal has published an article entitled "Why Children May Get More Gifted" about renewed interest in using taxable gifts to shrink an estate for tax purposes given President Obama's plan to freeze estate-tax rates.

For the article:
The article addresses the fact that using taxable gifts to shrink an estate for tax purposes became less common in recent years, as the Bush administration’s plan was for estates to be scheduled to pass tax-free in 2010. That has changed.
The uncertainty has made estate planning more complicated. It also caused some people to wait and see what happens on the estate tax before embarking on any gift strategies. If Obama’s plan is approved by Congress, making taxable gifts will be more compelling for some individuals with estates of more than $3.5 million and married couples with estates worth more than $7 million. In 2007 and 2008, estates over $2 million could be taxed as much as 45%. In 2009, the threshold rose to $3.5 million. Obama’s proposed budget keeps the tax rate for 2010 and beyond at 45% on estates over $3.5 million.
Gift strategies can get complicated and require an experienced estate and tax lawyer, but the basic idea is this: One gives away assets, usually to heirs, to shrink the size of the taxable estate. Gifts over $13,000 are taxable in 2009. Exceptions include tuition or medical expenses paid directly to an institution for someone and gifts to a spouse, political organization or a charity, which are generally tax-free.
Though many taxpayers want to defer paying taxes, it may be smarter to pay taxes now. An experienced estates and trust attorney who has expertise in tax law can help make sure taxable gifts are made in the most tax-efficient way that also considers the future taxable effect on the trust.
The article is a good reminder for our clients to consider the following about making gifts:
* Do you want to put the gift into trust to protect the assets from creditors?
* Have you given away enough ownership so that the gift is completed today? (Giving cash is easy, but what if you are giving away a beach house and plan to continue using it?)
*Have you valued the gift properly for purposes of filing the tax return?
Estate planning is significantly more complicated than portrayed in this WSJ article, but it is a starting point to help people understand the concept.

Questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210.
Henry (Hank) Moravec is a partner at Moravecs, Varga and Mooney. He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

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