It is that time of year again and in the financial and estate world, that means it is time to make annual gifts. It is usually during the latter part of the year where clients gift assets to carry out estate specific plans or other specific bequests in order to qualify such events for the current tax year. Gatherings for the holidays is an easy time to get signatures or give assets. There are many different strategies to use that can help carry out whatever objective one has. Let’s go over a few, but first some simple housekeeping:
The annual exclusion that one can give to another person is $14,000 for 2015. That means a husband and wife can give $28,000 to any single person. Anything above that can still be gifted, but will eat into the lifetime exemption that one has of $5,430,000 (for 2015). If you gift an appreciated asset, then the fair market value at the time of the gift is used to figure if a gift tax is due or if you have to use part of the lifetime exclusion, but the basis is transferred to the new owner, so any gains would be paid by the new owner if sold for a profit.
Often, with small businesses or LLCs, the owner will gift shares of the entity to another person or trust for the benefit of such person. If a trust is involved, a Crummey notice is required to be signed by the benefactor of the trust declining the receipt of said assets and those assets are free to stay in trust. Crummey notices are also common in the insurance world, where a trust will receive a contribution to pay a premium on a life insurance policy (usually insuring the grantor), a Crummey notice is sent to the trust beneficiaries asking if they want those funds or are if they free to stay in trust. Assuming they decline the funds, the policy will be paid and stay in force until the next premium is due. A grantor – let’s say it’s the father – giving to a trust for the benefit of his son is the same as giving directly to the son, so it is important to realize that subsequent gifts to the son for that year would count against the deduction.
Gifting to a charity is different as there is no exclusion amount. Often, people want to give cash, but consider gifting highly appreciated assets to the entity outright or to a charitable gift fund. You can give the same amount, but you will not be subject to gains in gifting highly appreciated assets. Some clients will use charitable gift funds as a way to make a large one-time gift to offset a large one-time tax event, like selling a business. This allows them to smooth the deductions against the income, but then spread the final gift from the charitable gift fund to the 501(c)(3) over many years. This strategy has been used to fund capital campaigns where a donor wants the entity to match any gift they give over X amount of years. With a charitable gift fund, the tax deduction is realized at the point where the gift is given to the gift fund, not the end recipient.
While advisers can help setup charitable gift funds and facilitate simple cash or security gifts, their value lies in helping execute complex strategies that are drafted, such as Crummey trusts, irrevocable life insurance trusts, charitable trusts, or gifting of illiquid non-standard assets like LLCs. In dealing with the more complex issues above, a competent adviser will work with the client and attorney on making sure Crummey letters are signed, valuations have occurred, cash is given and received, and determining which assets are the best to give a charity or future generation.
It is important to start this process now with your attorneys and advisers, as this is a busy time of the year (think April 15 for CPAs) and starting early is the best way to avoid missing any steps, rushing through the process or not being able to get the required signatures needed to facilitate these transactions.
This article is for informational purposes only. No information contained on this newsletter constitutes tax, legal, insurance or investment advice. This article should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Travis S. Anderson