retirement

Know the gift tax rules

Gift planning can help
There are numerous gift-selection factors that can soften the tax impact. It goes without saying, of course, that the selection of assets for gifting must primarily depend on the donor's particular goals and circumstances.

Here are some things to think about when choosing assets to gift:

•  Is the property likely to appreciate in value? A transfer of appreciating property removes the future appreciation from the donor's estate so it's not there for the estate tax. However, there's a tradeoff here if you give property while alive as opposed to after your death. If you wait until your death to bequeath the property, the recipient gets a tax benefit: a step-up in basis to the fair market value of the property as of the date of death. This generally results in the estate beneficiary having less taxable gain on the asset when and if it is later sold.

•  Is the donee in a lower income tax bracket than the donor? If high-income-producing property is transferred to a lower bracket family member, income shifting may be achieved. In other words, when the donee takes ownership of the high income-producing property, overall income taxes are reduced from the perspective of the family unit.

•  Is the property subject to indebtedness? A gift of property subject to indebtedness that's greater than its cost to the donor could cause the donor to realize capital gain. For example, suppose a donor makes a gift of a building that cost the donor $10,000. The building appreciated to $100,000 and had a $70,000 mortgage. The gift results in an income tax gain to the donor on the difference between the debt outstanding at the time of transfer ($70,000) and the donor's basis ($10,000). In this case, the gain is $60,000, and it is realized at the time the gift becomes complete.

•  Does the property have a sale price lower than the donor's basis in the property? If so, the donor should consider selling the property to take advantage of the loss deduction for income tax purposes and either gift the sale proceeds or perhaps select other property to gift.

•  Is the donor likely to need or want to use the property in the future? Or is gift likely to cause the donor any financial concerns or reduce the donor's customary standard of living? If so, this property would not make a good gift choice.

•  Does the donor have expectations or concerns about the donee's ability to manage or invest the gift? If so, the donor may be better off setting up a trust for the donee -- which is a topic for another column.

•  Is the donor concerned about equalizing the value or nature of gifts to donees such as children or grandchildren? If equalization of value matters to the donor, a trust arrangement could solve the problem. If it's the equality of the nature of gifts that's bothersome, a solution may prove more difficult. One solution: The asset could be sold and the proceeds divided equally amongst the donees. Donors have also been known to have donees draw straws -- a last resort.

•  Is gifting different assets likely to cause conflicts? Arranging a family discussion during which the donor explains his gifting reasons may prove helpful in discouraging conflicts among donees. Solutions to the equalization issues above could also apply here.

•  Is the donor concerned about the stability of the donees' marriages or the potential for future divorce? If so, be mindful that the departing spouse may be entitled to half the gift value.

•  Is the donor worried about the donees having creditors' claims? If so, making gifts to an irrevocable trust for the benefit of the donees (trust beneficiaries) makes it difficult for creditors to reach the assets.

Who knew that being generous could be so complicated? But when aspects of the gift tax are known and some proper planning is reviewed, gift tax can be minimized and possibly avoided altogether.

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