Asset Protection & Charitable Giving Guide
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Step Five: Gifting Away Your Estate STEP FIVE: GIFTING AWAY YOUR ESTATE When most people think about gifting they think of cash gifts. They think of writing a check, many times at Christmas or birthdays. As a result, when they are told by an estate planner they have to make annual gifts of $11,000* to reduce the size of their estate, they become uncomfortable and insecure. The most common response is "I don't have that much cash to give!" Gifting does not necessarily have to involve cash gifts. In fact, most people who make cash gifts do so with after-tax income dollars. In other words, they are using money generated from their income for which they have already paid taxes. As an example, assume you own rental property worth $100,000. That property generates $8,000 a year in income. If you simply gift away the $8,000 of income, you have not reduced the current size of your estate. You may have stopped it from growing (other than the appreciation of the rental property). But you have not reduced it. Since the gifting process described here is one to be used to help reduce the size of your estate, using after-tax income dollars will not achieve your goal. You must gift a portion of the principal of your estate. By creating one of the entities described above, you can transfer some of your assets to the name of the entity. Using the above example, if you put your rental property into an LLC and then gift a $11,000 interest to each of your four children, you have reduced your estate by $44,000. If your spouse will likewise join in making gifts, you can reduce your estate by a total of $88,000. The rental property will still generate the same income (which you can control) and you still have the right to sell or mortgage the property. However at your death, instead of having a $100,000 asset, your interest in the LLC might be valued at $30,000 or less. Gifting must be done very carefully. In order to be effective, a gift must be complete. You cannot simply write a check and not have it cashed. The gift is not complete until the check is cashed! Also, the form of the gift is very important. If you simply deed your child a $11,000 interest in real property, they and their creditors can control the particular interest in the property and possibly prevent you from selling, encumbering and managing it. If you don't provide adequate safeguards in making gifts, spouses or other parties can end up owning the interest you gave to your child or other beneficiary, thus defeating one of the purposes of making the gift - sharing your estate. Before you consider gifting, consult with one of our estate planning attorneys. An annual, planned program of gifting can transfer a large amount of wealth to your family while you continually retain control of the wealth transferred. This wealth transfer can avoid estate and gift taxes as well as protect the assets transferred from creditors. Gifting does not need to be limited to your individual beneficiaries. Many people who have provided adequately for their children and other intended beneficiaries choose to benefit charitable concerns. Charitable giving allows your estate to avoid estate taxes on the portion of your estate gifted to charity and during your lifetime, can provide you with tremendous income tax benefits. Charitable giving is described in the next portion of this book. * This is increased from $10,000 in prior years due to indexing for inflation |
