Gifting to Family and Charity
In 2005, you may gift as much as $11,000 a year to each child (or anyone you please) free of estate taxes. Any amounts over $11,000 per year are deducted from your lifetime gift exclusion. Check www.irs.gov for current information.
Gifting to Children
There are two acts that allow you to contribute to investment accounts for the specific benefit of your child:
- UTMA. The Uniform Transfers to Minors Act (UTMA) is offered in all states except South Carolina and Vermont.
- UGMA. The Uniform Gifts to Minors Act (UGMA) is only offered in South Carolina and Vermont
Both accounts allow parents, grandparents, and even non-relatives to contribute an irrevocable gift to minors. This means that the account is set up in the child's name, and when the child comes of legal age (varies by state) he or she will receive the money and earned interest.
529 savings plans
Another way to gift assets is through a 529 state college savings plan. Parents or grandparents may designate money for their (grand) children's college education while benefiting from the following estate planing advantages:
- In 2005 contributors may roll 529 plan contributions up five years for tax purposes-so instead of gifting $11,000 a year tax free, they may contribute up to $55,000 in one year
- 529 contributions are no longer considered part of an estate, so they are not subject to estate taxes upon the account owner's death
- Contributions may qualify for a state tax deduction
- Earnings avoid state taxes
- Earnings grow federal tax deferred
- Earnings void taxes altogether when used for beneficiary's college tuition (taxed to beneficiary)
- Should the beneficiary decide not to attend college, the account owner may name a new beneficiary or retain control of the assets (subject to a 10% penalty on earnings used for non-college related expenses)
Gifting to charity
The charitable remainder trust (CRT) allows a tax deduction for all assets set up in a trust as an eventual gift to a qualified U.S. charity. CRTs allow people with large estates to take advantage of a triple tax break: An income tax deduction, the avoidance of capital gains on highly appreciated assets, and no estate taxes on the charitable contribution upon your death.
The following are steps to setting up a CRT:
- Set up a CRT with low-income producing assets, such as highly appreciated stock
- You may take a tax deduction on the full value of the gifted assets in the year you set up the trust, or carry it forward over five years
- Have the trust sell the assets and reinvest the money in higher-income producing assets
- Set up an annuity schedule whereas the trust pays out a percentage of the account's assets, either for life or over a specified term
- After you pass on or the term ends, all assets remaining in the trust go to the charity(s) of your choice, avoiding any estate tax liability
A CRT allows you to offset the tax liability of a lump sum cash windfall, yet still receive a steady income throughout your life. Plus, in the end, what remains of your estate will transfer to the charity of your choice.