A Simple Way to Transfer Wealth
Courtesy Dan and R. Brennan Barlow, Denton County LIVING WELL Magazine
Thanks to the 2010 tax-relief legislation, the rules for estate planning are very favorable in 2012. This two-year window of opportunity provides the incentive to act now.
Lifetime gifts can be a simple, effective way to transfer your wealth to other individuals – provided you know the tax rules. Here’s a brief overview of three opportunities you may want to consider that allow you to make transfers without any estate or gift taxes.
Annual exclusion gifts. Did you know you can give up to $13,000 per year to as many people as you like? And you can gift to anyone, not just family members. If you are married, you and your spouse can give $26,000 per beneficiary per year.
Annual exclusion gifts are attractive because they’re simple – no tax reporting is required. They reduce your taxable estate (potentially saving a 35% tax), and there are no lifetime limits, as long as you stay within the annual limits. Gifts to individuals are not taxable income to the beneficiary and do not create any income tax deduction for you.
Lifetime exclusion gifts. With this type of gift, you can make gifts above $13,000 per person per year, without paying gift tax, up to a $5,000,000 lifetime limit (this amount is scheduled to change in 2013). Let’s say you give $100,000 to a family member. The first $13,000 is covered by the annual exclusion; the remaining $87,000 is applied to your lifetime exclusion. If this was your first gift exceeding annual exclusion limits, you would have $4,913,000 of lifetime exclusion remaining.
When making this type of larger gift, you should keep in mind that a gift tax return is required. You must report the gift, but will not owe gift tax. In effect, these lifetime transfers “use up” part of the exclusion that would otherwise be available at death to reduce your estate tax.
The key benefit is that if you transfer assets that appreciate in value, all of the future appreciation is removed from your taxable estate, although the recipient takes on your cost basis and holding period for income tax purposes.
Direct gifts (tuition and medical expenses). There are special rules in place for direct gifts of tuition or medical expenses. You can pay tuition or medical expenses for another person, without limitation. These gifts do not count against the annual exclusion or lifetime gift exclusion. However, you must pay the school or medical provider directly. Funds given to the beneficiary directly will not qualify. And “tuition” means just that – tuition only, not books, supplies, fees or room and board. No specific tax reporting is required, but as a rule you should keep good records. Ultimately, it is your responsibility to be able to prove that your gift qualified under this rule.
Wells Fargo Advisors can help you determine the best gifting strategy that benefits you as well as the individual(s) on the receiving end. Call your financial advisor today to discuss your gifting options.
The information in this article reflects federal tax laws in effect for 2011 and 2012, after the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
Wells Fargo Advisors does not render legal or tax advice.
This article was written by Wells Fargo Advisors and provided courtesy of Dan and R. Brennan Barlow, Managing Partners in Flower Mound at (972) 539-1400.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Barlow Capital Advisors, LLC is a separate entity from WFAFN.
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