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Gift Now Or At Death? Not As Simple As It Used To Be

Gift now or at death? Not as simple as it used to be

Since many estates now fall under the 2013 federal exemption amount of $10.5 million, the need to remove assets from your estate by giving them as gifts may not be as critical as it once was. In the past, one part of estate planning included gift decisions: Grantors had to decide whether to give away assets while they were living, whether outright or in trust, in order to remove the asset and any appreciation from their estate.

However, the increased exemption amount—as well as portability options—has given us some planning flexibility. At the same time, changes in capital gains rates and creation of the Medicare surtax have added some complexity. What does this mean to you? In essence, making gifts to your beneficiaries may not be the obvious choice anymore.

Instead, you need to take a closer look at several factors that could affect your decision about giving gifts now or later. These factors could include the grantor’s age and/or life expectancy, state of residency, asset base, the cost basis of the asset being gifted, trust tax rates, the beneficiaries’ tax rates, trust drafting and more.

Let’s look at an example: A couple has a $7 million estate. They are Florida residents. Their financial-independence analysis indicates they could gift $1 million with no significant impact on their lifestyle. As a result, they’ve decided to make a $1-million gift to their beneficiaries. Does it make sense to gift the asset now, or wait and leave the asset as part of their estate? We’ll assume they won’t have a federally taxable estate (and no Florida estate or gift tax). If they leave the asset in their estate and it grows to $2 million, upon the death of the second spouse, that $1 million gain would get a step-up* in basis. The beneficiaries would receive $2 million estate and income-tax free.

On the other hand, if the couple gifted the $1 million asset to a trust and it grew to $2 million, the kids would still get $2 million. However, they would now have to pay capital gains taxes on the $1 million gain in the trust if they liquidated the assets. Depending on tax rates (whether the beneficiaries’ or the trust’s), the children may only net $1,762,000: $2 million minus $238,000, assuming a 23.8% capital gain plus Medicare surtax rate.

In that example, it may make more sense to leave the asset in the estate.

Now let’s assume the couple lives in New Jersey. In the Garden State, you can only shelter $675,000 from state estate taxes. Thus, by gifting the asset and removing the appreciation, they save approximately $260,000 in New Jersey state estate taxes. They’ve reduced their estate from $8 million at death to $6 million for New Jersey tax purposes. In this example, it may make more sense to gift the asset during life.

Other factors can also affect your decision. Low-cost-basis assets are often best left in the estate to benefit from the basis step-up, whereas high-basis assets (like cash) may be better to give as gifts in advance, especially if you don’t have a long investment time horizon. Below is chart that provides a rough guideline of when it may make sense to gift to a trust or leave the asset in your estate. However—and this is very important—the answer usually isn’t straightforward. You have to run the numbers!

 

 Estate TaxabilityLow- or Zero-Basis AssetsMiddle-Basis is 50% of GiftHigh-Basis Asset or Cash
 No estate Tax Considerations Gift is usually better after 25 years Gift is usually better after 20 years Gift is usually better after 14 years
 State Estate Tax Only Gift is usually better after 15 years Gift is usually better in 7 years It is usually better to gift
 Federally Taxable Estate No gift – leave asset in estate for step-up It is usually better to giftIt is usually better to gift

 

Before making any major gift decisions, we recommend you consult your attorney, accountant, and Wealth Advisor to discuss legal, tax, and financial ramifications. The best gift is always the best-planned gift.

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Please remember that RegentAtlantic does not provide tax or legal advice. Please consult with a tax or legal professional of your choosing prior to implementing any of the strategies discussed in this article.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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