Estate Planning: Five Tips for Gifting in 2012

Written by Melissa Schwab, Staff Accountant

As we enter the third week of October, the temperatures are getting cooler and the leaves on the trees are beginning to fall. With only about 11 weeks remaining in 2012, now is a great time to start thinking of gifting before the end of the year. To help you prepare, we’ve compiled the following list of important gifting tips which may allow you to avoid or reduce unnecessary estate and gift taxes:

1.  Know the difference between future interest and present interest when gifting property. When gifting property, it is very important to consider whether the gift is for present interest or future interest, especially if the annual gift tax exclusion (currently at $13,000) is important to your planning objective. If the person receiving the gift is unable to enjoy the property today, then the gift is considered a future interest gift in that property. For the annual exclusion to apply, the property that is being transferred must be a present interest gift (i.e. something that can be enjoyed upon receiving the gift) and not a future interest gift.

2.  To maximize the 2012 gift tax exclusion, don’t overlook gift-splitting with a spouse. Gift splitting allows you to make the most of the amount you and your spouse can give tax free, regardless of whose assets are used to make the gift. Although the current gift tax exclusion is $13,000, for 2012, gift-splitting allows you to give up to $26,000 of tax free gifts to any one individual if your spouse agrees to treat half of the gifts as being made by him or her.

3.  Make direct payments for gifts of tuition or medical care expenses. When you gift an individual by paying for their tuition or medical expenses, and you make direct payments to the institution, hospital, or medical provider for these expenses, your gift is completely tax free. However, if you choose to pay the individual who is receiving the gift (rather than the institution, hospital, or medical provider), your gift will be subject to the $13,000 annual gift tax exclusion.

4.  Beware of the kiddie tax rules when transferring income-producing property to children.Under the kiddie tax, children pay tax at their own income tax rate on unearned income they receive up to a threshold amount ($1,900 in 2012). However, all unearned income that children receive above the threshold is taxed at their parent’s highest income tax rate, which can be as much as 35%. The kiddie tax rules apply to children who are: (1) Under age 18 at the end of the year, (2) age 18 at the end of the year with earned income that doesn’t exceed half of their annual support, and (3) ages 19-23 who are full-time students with earned income that doesn’t exceed half of their annual support.

5.  Consider the consequences of making gifts in trusts due to their compressed income tax rate structure. For 2012, the maximum tax rate for trusts (35%) is applied once taxable income goes above $11,650. However, for individuals, the tax rate of 35% doesn’t kick in until taxable income exceeds $388,350. If you are thinking about making gifts in trust prior to the end of the year, you may want to consider making the trust a grantor trust (for income tax purposes) or establishing trust investments in non-income or exempt income producing assets.

Although this is not an all-inclusive list, it should be of some assistance in your gifting plans. Remember, everyone’s situation is different. The amount and nature of your assets, as well as your tax status and goals are all important considerations when planning on giving or receiving significant monetary or property gifts.

As always, HBE Becker Love LLP’s team of trusted advisors is here to help. Our Estate & Trust Specialty Team has the knowledge and experience to help with your gifting needs. For more assistance or to discuss questions you may have in making or receiving gifts, please contact our office (402) 423-4343.

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