Gift Tax Strategies Can Benefit Family

Today’s large gift tax applicable exclusion amount, low gift tax rates, depressed property values, and low interest rates create a favorable environment for making certain gifts.

Federal gift tax basics

Annual exclusion — Each year, you can give a certain amount ($14,000 in 2013 and 2014) to as many individuals as you like, gift tax-free.

Qualified transfers exclusion — You can give an unlimited amount on behalf of any individuals for tuition or medical expenses gift tax-free. You must pay the amount directly to the educational or medical care provider.

Applicable exclusion amount — Gifts can also be sheltered by the applicable exclusion amount, which can protect gifts of up to $5,340,000 in 2014, $5,250,000 in 2013. The dollar limit applies to all taxable gifts you make during your lifetime and to your estate at your death for federal estate tax purposes.

Basic planning

You can make unlimited annual exclusion gifts to anyone for any purpose. The annual exclusion is lost in any year in which you do not use it.

Next, consider gifts that are sheltered by the applicable exclusion amount. But, remember that use of the applicable exclusion amount during life reduces the amount available for estate tax purposes at your death.

Gift considerations

If you have property whose value is depressed, now may be a good time to make a gift of it. The gift tax value of a gift is its fair market value, and a lower value means a smaller gift for gift tax purposes. However, you generally should not make gifts of property that would produce an income tax loss if sold. Instead consider selling the property, claiming the loss, and making a gift of the sales proceeds.

Future appreciation on gifted property is removed from your gross estate for federal estate tax purposes. However, while property included in your estate generally receives a basis stepped up (or stepped down) to fair market value when you die, lifetime gifts do not. Therefore, you may wish to balance the gift tax advantage of a gift with carryover basis and income tax on gain, if the property is sold against the income tax advantage of a stepped-up basis and estate tax (if any) if you retain the property until your death.

You may wish to consider a grantor retained annuity trust (GRAT), in which you transfer property to a trust, but retain a right to annuity payments for a term of years. After the term ends, the remaining trust property passes to your beneficiaries. The value of the gift of a remainder interest is discounted for gift tax purposes.

Also consider a low-interest loan to family members. You are generally required to provide for adequate interest on the loan, or interest will be deemed for gift tax purposes. Currently, you can provide loans at a very low rate and family members can effectively keep any earnings in excess of the interest they are required to pay you.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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