Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 16, 1993 TAG: 9308160017
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Sometimes, according to the Institute of Certified Financial Planners, it pays to make gifts of money even if the government taxes your generosity.
The trick is to know when it pays and how to go about making the gifts.
The first rule in gift giving is "don't give anything away you can't afford," the institute warned.
Some parents especially want to give children their homes or their certificates of deposit while they are still living.
But with rising health-care costs and many people living many years beyond retirement, "you're going to have to stretch those dollars a long way," the institute said.
There are tax benefits, however, if you can afford to make gifts and if you want to give some of your assets to your children, grandchildren or other beneficiaries while you're still alive.
But consider also that probably the single-largest tax benefit comes after you die. The institute pointed out that your entire estate, regardless of its size, can be passed to a surviving spouse free of federal estate tax.
The problem arises when that spouse dies holding all of the assets. The estate will be subject to federal estate tax if it is valued at more than $600,000.
This year, the federal estate tax rates start at 37 percent for estates valued at more than $600,000 and climb to 50 percent for estates valued above $2.5 million.
The planners said Congress is expected to bump up the rate retroactively to 1992's level of 55 percent on estates valued at more than $3 million.
Years ago, an estate worth $600,000 was fairly rare, the planners said, but today they are common thanks to larger retirement accounts, more life insurance and built-up value in homes.
The first option for lowering the estate-tax bite during your lifetime is to give away up to $10,000 each year. Such gifts are tax free if in cash, property, securities or nearly any other asset to a designated beneficiary.
That amount can double if both spouses do the same thing, the planners said.
And if the couple has two children and each child has two children, a couple potentially could give away, free of tax, as much as $120,000 a year. Over two years this will save at least $88,800 in federal estate taxes if your taxable estate exceeds $600,000.
Beware that the gift tax kicks in on gifts of more than $10,000 in a year to a single beneficiary.
In that case, you must file a gift tax return. The tax is calculated on a cumulative lifetime basis: each gift is added onto past gifts, moving you up through the tax brackets.
Instead of paying the tax directly, however, you can let the excess simply reduce your $600,000 lifetime estate tax exemption.
As an example, the institute said, you might have used up your lifetime exclusion, but you want to give $30,000 in securities to your daughter. Then the $20,000 above the $10,000 annual gift tax exclusion would be subject to a 37 percent gift tax or $7,400.
But what if you keep the securities in your estate and pass them to your daughter at your death 20 years later?
Even at a modest growth rate of 5 percent, the institute said, that taxable $20,000 portion of the property will have grown to $53,095, assuming no income tax along the way.
Now the tax bite is nearly $20,000 or larger if you're in a higher federal estate tax bracket.
If you had given the securities to your daughter in the first place, the planners noted, she probably would pay a capital gains tax on the appreciation, but those rates are lower than estate tax rates.
The planners offered another scenario.
Suppose you want to transfer $50,000 to your son. But you've used up your $10,000 annual gift tax exclusion and your $600,000 lifetime exemption.
Assuming a 41 percent federal estate tax bracket, if you give away the $50,000 while you're alive, you'll need a total of $79,500. That's $50,000 for the gift and an additional $20,500 to pay the gift tax.
If you die within three years of the gift, it reverts to the estate for tax purposes.
If you wait until your death to transfer the $50,000, however, you'll need $84,750 because the money used to pay the estate tax on the $50,000 will itself be subject to estate tax.
The institute suggested consulting a professional before proceeding because complex tax trade-offs and other gifting rules are involved.
by CNB