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Should I Make Gifts In 2010? The How and Why of Gifting In The Current Environment

Why gifts might really be savvy and how to make gifts to children and grand children in 2010.

It looks like there may not be meaningful estate or gift tax changes in 2010. And, the crash landing of the nasty old federal estate tax on January 1, 2011 means that we will soon return to a tax regime that is highly unfavorable to the tax payer. And, while the situation is so fluid, the advantages of making gifts during this tax year are significant.

So, if you are an individual with assets of more than one million dollars, or a couple with assets in excess of two million dollars, and you can make gifts without harming your retirement lifestyle, and/or you have significant retirement income, then gifting in this year looks like a very good strategy.

So how and why make gifts (taxable or not) in 2010?

Non Taxable Gifts:

Annual Gift Tax Exclusion Gifts:
Every year, each taxpayer gets an annual gift tax exclusion of $13,000.00 per person without incurring gift taxes. This allows you to give cash, stocks, bonds or other assets worth that amount to each person such as children and grandchildren. When these transfers are made, you avoid the tax on those assets AND the growth of the assets after the gift is made.

Gifts of Medical and Educational Expenses:
In addition to the annual gift tax exclusion you can also make additional gifts of tuition, and medical expenses over and above the $13,000.00. However, these gifts are restricted as to the recipient, and they must be paid directly to the school, or the health care provider. This can be a great technique, but if you do it wrong, taxes could result. Make sure to consult your tax adviser or estate planning lawyer.

Life Time Exclusion of $1 million Dollars:

In addition to the renewable annual gift tax exclusion, each tax payer gets a 1 million dollar exemption from tax that they can make during his or her lifetime. This means that couples can transfer assets valued at up to $2 million dollars during their lifetimes, without triggering a gift tax. So, if you want to create a trust, or move assets with larger value out to the heirs, then you (and a spouse) can each allocate amounts of up to $1 million dollars to such transfers to avoid paying gift tax. This again helps to move not just the asset, but also the appreciation of the asset out of your estate.

Grantor Retained Annuity Trusts and Charitable Lead Annuity Trusts are especially useful in a low interest rate environment, and when asset values are low. We are in a historically low value and interest rate environment so be sure to ask your adviser about these techniques.

Taxable Gifts: If you have already used your exemption and you want to give assets worth more than the annual gift tax exclusion, you might consider a taxable gift. Even thoug, there are n estate taxes for 2010 (so far), there is still a gift tax. However, the tax rate of thirty-fuve percent looks very favorable to the top rate of fifty-five percent next year. Consult your adviser about the pros and cons of taxable gifts.

Why consider these gifting techniques when the laws might change?

We are in a period of historically low estate and gift tax rates and many assets have reduced values during this difficult economy. This means that we may be able to move more value to our heirs at very low tax rates or without taxes.

Furthermore, many techniques such as GRATs and CLATs work extremely well in low interest rate environments. And, while it is impossible to predict what will happen later this year or next year with any certainty, economic pressures on Congress make it unlikely that the tax will be eliminated or the rates significantly lowered.

Planning now for strategic gifting may allow you to pass on significant wealth without endangering your own lifestyle.

David M. Frees III, Esquire

For a consultation on gifting, updating your estate planning, or the use of trusts, call 610-933-8069 or contact David at 610-933-8069

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