How to smartly give away assets during your lifetime
Giving away your financial assets can be more complicated than just writing a check, so if you want to engage in lifetime gifting of some of your assets, you should be aware of certain rules.For instance, in 2010, the maximum annual gift tax exclusion amount is $13,000 per person. The lifetime federal gift tax exclusion amount is currently $1 million, and it will remain at that level through 2010. The top federal gift tax rate is 35 percent for 2010 (the maximum that your heir may need to pay on your gift). Any portion of the gift tax exclusion used will reduce dollar-for-dollar your estate tax exclusion available at death.In light of all this, you may want to consider some creative lifetime gifts:A charitable remainder trust is a tax-exempt way to distribute income from the trust to beneficiaries for a period of time after which remaining assets are distributed to charities of your choice. You determine the time frame of the trust – it can last a lifetime or for a fixed term of up to 20 years – as well as the amount of annual payouts.There are some requirements. First, the annual payout for the length of the trust or the life expectancies of the beneficiaries (which would be you or your spouse) cannot exceed 50 percent or be less than 5 percent of the value of the trust. And a private foundation or donor-advised fund may be named as the charitable remainder beneficiary.Highly appreciated assets owned by the trust can also be sold without an immediate capital gain, which may allow for an increase in current income as well as income tax deduction. However, the type of assets gifted and the type of charity receiving the gifts, as well as your adjusted gross income, are all taken into consideration in determining your charitable income tax deduction. What’s more, there may be income tax due on your annual payouts from the trust.Charitable lead trusts are funded with assets that are, preferably, expected to appreciate. The charity of your choice receives a fixed annual payout from the trust, and the remainder goes to your family members at the end of the charity’s payout term.Unlike charitable remainder trusts, charitable lead trusts are not tax-exempt. The primary benefit of a CLT lies in its potential gift-tax advantages. The value of the donor’s initial gift to the trust is determined by three factors: a government-set interest rate, the length of the trust and the payout to charity. When the government-set interest rate is low, the value of the donor’s gift is reduced for gift tax purposes. So CLTs are particularly attractive in periods of low interest rates.A grantor retained annuity trust allows you to pass assets you believe will appreciate in value to family members at discounted levels. You contribute assets to a trust and receive a fixed annuity payment stream for a specified period of years. At the end of the trust term, the remaining assets and their appreciation (if any) are distributed to your beneficiaries.Since the value of the gift is reduced by the present value of the annuity payments, you could structure a payment schedule and payout amount that could result in a minimal gift-tax value. However, if you die before the end of the specified term, some or all of the remaining trust property would be included in your estate and subject to estate taxes.Life insurance can help replace your estate and gift tax liabilities. A policy may be used by itself to increase the size of your estate or it may be used for cost-effectively paying estate taxes. Plus, the proceeds of life insurance are typically income tax-free to the beneficiary. And with careful planning, these proceeds may also be received estate tax-free.A limited liability company or family limited partnership may help reduce the size of your estate for transfer-tax purposes. The LLC or FLP is made up of managing or voting interests and nonvoting interests, and you could gift the nonvoting interests to your children and grandchildren.Since the non-voting interests are not readily marketable, they might be discounted for gift tax valuation purposes.A dynasty trust could allow you to establish a source of funds for multiple generations. Here’s how it generally works: You would fund the trust with an amount up to you and your spouse’s lifetime gift tax exclusions. The trust assets, including any growth, will remain free of federal transfer taxes (i.e., estate, gift and generation-skipping transfer taxes) for as long as they remain in the trust.Income or principal from the trust may be distributed to your children, grandchildren and great grandchildren as specified in the trust document.The provisions could tie those distributions to incentives, such as maintaining gainful employment, and permit distributions for funding businesses or purchasing homes for the use of beneficiaries or other activities. There also may be provisions in the trust document to gift a percentage of the assets directly to a charity or family foundation.Donald E. Sommese is a financial adviser at Morgan Stanley Smith Barney, Manchester, and may be reached at 603-629-0233.