Normal and Recurring Lifetime Gifting Programs
The gift tax annual exclusion remains at $14,000 per donee. This allows a married couple to split their gifts for up to $28,000 per year to each donee. It is important to note that all gifts made to an individual donee are counted. Therefore birthday, holiday and graduation gifts must be carefully tracked so that gifts in the aggregate do not exceed the $14,000 annual exclusion.
Individuals can also make direct and unlimited payments of tuition or medical expenses if made directly to the educational institution or medical service provider. The payments must not be made to the individual donee. Direct payments to an educational institution or medical service provider also do not have to be reported on the Form 709 gift tax return. Section 529 plans allow the opportunity for parents, grandparents and other relatives to help fund educational costs. There is also a five-year election available which allows an individual to gift up to $70,000 per donee as the gift will be spread out over five years. Contributions may also be deductible for state income tax purposes.
Life insurance is often one of the largest assets of the estate. Life insurance is taxable in the insured’s estate if he or she possessed “incidents of ownership “in the policy at the time of his or her death. Therefore, planning can be done through Irrevocable Life Insurance Trusts, or ILITs, in which the policy is transferred from the insured to the trust entity. With proper planning and administration, the life insurance proceeds will not be taxable in the insured’s estate and will provide more assets to transfer to heirs.
Advanced Gifting Techniques
Advanced gifting techniques may allow you and your spouse to fully utilize and leverage your lifetime gift exemptions. Some of these advanced planning techniques have recently become popular due to a reduction in interest rates.
Grantor Retained Annuity Trusts, or GRATs, allow donors to transfer assets with high appreciation potential out of their estates, provided certain conditions are met. The donor will fund the GRAT with these highly appreciating assets and must receive annuity distributions from the trust based on annuity calculations and over a certain time period. Another requirement for the GRAT is that the donor must outlive the annuity term or the assets will revert back to his or her estate. GRATs typically are drafted to be short in duration with a typical minimum term of 2 years.
Qualified Personal Residence Trusts, or QPRTs, allows a donor to transfer his or her personal residence out of his or her taxable estate and into a trust. If structured properly, the QPRT will freeze the value of the donor’s residence at the time the trust is created and may result in significant estate tax savings. The QPRT will also allow the donor to live in the house during the trust term. Once the trust expires, the donor can lease the residence from the beneficiaries at the fair market rent and continue to live in the house.
Family Limited Partnerships (FLPs) are a way for donors to transfer a business interest to heirs. The key benefit in FLPs is that discounts are taken on the value of the business interests based upon the principles of “lack of marketability” and “lack of control.” These elements are inherent due to the nature of closely held businesses.
Charitable Remainder Trusts such as Charitable Remainder Annuity Trusts (CRATs) or Charitable Remainder Unitrusts (CRUTs) allow a donor to transfer assets out of their estate and take a charitable deduction based upon the present value of the remainder interest that passes to charity. The donor or other income beneficiary will receive taxable income during the life of the trust and pay the tax on their individual returns.
Charitable Lead Trusts (CLTs) may allow the donor to take an immediate charitable deduction on the present value of the interest that passes to the charity during the life of the trust. Upon the termination of the CLT, the remaining assets canpass to a trust set up by the donor for the benefit of the donor’s heirs.
The sale of assets to Intentionally Defective Grantor Trusts, or IDGTs, allows a donor to transfer or sell appreciated assets to a trust in return for an installment note. The transfer will be exempt for gift and estate tax purposes if certain requirements are met.
These sophisticated gifting techniques require careful planning and often require an appraisal by a qualified appraiser. There has been recent discussion by the Treasury Department in their “Green Book” proposals that may potentially limit some of these benefits. For example, proposals have been made to limit GRAT terms to a minimum of 10 years instead of the two-year minimum which is the current norm. Another proposal that has been considered is to not allow sales to IDGTs. Careful attention to potential legislation must also be given for optimal planning.