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Seizing the Tax-Friendly Gifting Moment

Now is the time, tax-wise, to give a lot of money away.

New tax rules in 2011 should make it a top priority for the wealthy to consider whether to make a gift, and when. The rules let someone give away a lot more money free of gift tax than ever before.

When Congress extended the Bush tax cuts late last year, the deal also included a big rise in the amount a person can give away tax-free over his or her lifetime. Since 2001, total gifts over $1 million had resulted in a tax. The new ceiling is $5 million. The new rules last only through 2012. What happens after that is a mystery, so many wealthy taxpayers want to make sure they give away $5 million–plus all growth and appreciation on that gift–while the giving is good. For married couples, there is $10 million at stake.

The issue of how best to help clients take advantage of the new gift-tax rules is “the hottest one out there, by far” for tax advisers, according to Robert Keebler, a certified public accountant in Green Bay, Wisc.

The very wealthy who can afford to part with $5 million — or $10 million for couples — should definitely go ahead and do so in the next two years, according to several advisers. This timeline for gift giving also makes sense for those who are affluent but not extremely rich. Where a person resides should be factored into this decision, of course, because cost of living varies.

Who shouldn’t give? Single or married people who may need the money down the road, or someone whose estate is going to charity.

The lifetime limit of $5 million applies only to gifts above the $13,000 per recipient rule, which allows people to give each year tax-free to any number of recipients (the actual dollar limit changes yearly). So, giving lots of individual gifts below the $13,000 benchmark will help you avoid cracking into that limit. If a parent gave a child $50,000 in a given year, for example, only $37,000 would be counted against the lifetime exemption.

Many folks have already given away the former lifetime exemption of $1 million per giver. Now they have to decide whether to go ahead and give away another $4 million. Circumstances are obliging them to think more quickly than they would otherwise.

“If they knew the transfer tax opportunities would be there forever, many clients would defer large wealth transfers,” says James H. Cundiff, a partner at McDermott Will & Emery in Chicago.

Giving a gift (and this can be stock, money or other assets like a stake in a business) outright isn’t the only approach. The right strategy in many cases is to put the gift into a trust, rather than giving the recipient the cash in hand. Lauren Y. Detzel, chairman of the estate and succession-planning department at Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, said there are “lots of different ways” of doing this, using grantor retained annuity trusts, discounted gifts in trust and other kinds of trusts.

Those who see a big tax opportunity but wince at the prospect of parting with millions of dollars may decide to make the gift to a multigenerational trust for which a spouse can be a beneficiary. That way, money can flow back into the household in case times eventually get tighter than anticipated.


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Comments (3 of 3)

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    • To Anon @ 2:18,Sorry to have skipped over you.We have a right to peeucfally assemble guaranteed in the Constitution but we often have to ask the government for a parade permit or the terms including places and numbers where we can picket.Thanks for a comment that made me and I’m sure others think.John

    • Not sure the answer to your first question, but the answer to your second question is No. No tax would be due on the $500,000, although it is counted against the $5 million. Only if you gift OVER $5 million during your lifetime do you pay any taxes, at a 35% rate, and only on the amount over the $5 million. Keep in mind however, that all gifts (those over the annual $13,000 per person per year) are brought back into a decedent’s estate for federal (and sometimes state) estate tax purposes.

    • In essence if an individual is attempting to gift a certain amount lets say $500,000 by gifting that person $13,000 a year (so as the recepient doesn’t have to pay any tax on the gift) would the recepient be better off receiving the $500,000 in a lump sum,? and would they have to pay tax on the lump sum of $500,000 if the $500,000 was counted toward a lifetime gift of $5 millon?

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.