Gift Tax

Tuesday, December 16, 2014

Passing Wealth to Your Grandchildren without Tax Penalties

Many grandparents want to pass their wealth to their children or grandchildren while they, the grandparents, are still living. Gifts to your loved ones can be a good way to reduce a taxable estate. Currently, the law (2014) allows you to give a child or grandchild $14,000 a year without paying a tax on the gift. Note that this exemption applies only to gifts made during the lifetime of the individual who is doing the gifting.  However, one major consideration is whether or not the child is mature enough to handle the acquisition of a large amount of money.

A "Crummey" trust provides a way to take advantage of the gift tax exclusion while keeping the money in a trust until the child is old enough to handle it.

The benefit of putting money for a child into a trust is that you retain control over the time and amount the child will receive. Simply putting money into a regular trust will generally not prevent the gift from being taxed. In order to avoid the gift tax, the child must have a "present interest" in the money. This means that child must be able to access the money the instant the trust is created. As such, a promise to give a child money at a certain point in their life, i.e. when the child “matures,” does not count as a present interest. Thus, most gifts to trusts are not excluded from the gift tax.

The Crummey trust is designed to allow you to put money into a trust and receive a gift tax exclusion. Essentially, the Crummey trust includes a provision that gives the beneficiary (the child or grandchild in our scenario) a certain amount of time to withdraw money before it is transferred into a trust. After the designated amount of time has passed, the beneficiary can no longer access the funds and it becomes subject to your trust designations. When establishing a Crummey trust, it is very important that the creator of the trust notifies the beneficiary of the gift as well as his or her right to withdraw the gift.

If this notice is not given, it is very likely that the IRS will tax the gift. Given the existence of the temporary present interest, there is the risk that the beneficiary will withdraw the money right away. However, once the temporary time period has expired, the gift will be a part of the trust, you control how much the beneficiary can receive and when.

For more information about end-of-life asset management, or further information regarding Crummey trusts, please contact the experienced elder law and estate planning attorneys at Maroney Associates, PLLC.  Call us today at 866-994-2025.  

Tuesday, November 4, 2014

To Gift or Not To Gift?

During the course of estate planning, many families consider passing their homes onto their children as gifts. While this seems like a reasonable consideration, there may be potential tax ramifications for such a transaction.

Under current federal law, when you give anyone property worth more than $14,000 in any one year, you are required to file a gift tax form.  Additionally, the law stipulates you can gift or “give away” a total of $5.34 million over your lifetime without incurring a gift tax. This means that, if your residence is worth less than $5.34 million, you likely won't have to pay any gift taxes. However, you still must file a gift tax form, assuming it's worth over $14,000.

Here is the issue: While you may not have to pay gift taxes on the gift (a house), if your children sell the house right away, they may incur a steep tax penalty. When you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. Any profit from the sale can then be taxed. Therefore, they may lose a significant amount after the sale of the property.

For example, suppose you bought the house many years ago for $200,000 and it is now worth $450,000. If you give your house to your children, the tax basis will be $200,000. This means that if your children decide to sell the house, they will have to pay capital gains taxes on the difference between $200,000 and the selling price. The one exception to this capital gains tax liability is that, if your children live in the house for at least two out of the five years before selling it, they can exclude up to $250,000 ($500,000 for a married couple) of their capital gains from their taxes.

However, property that is inherited is not subject to the same taxes as property that is gifted. If your children were to inherit the property, the property’s tax basis would be "stepped up." This essentially means that the tax basis would be the present value of the property as of the date of death of the decedent, leaving the house through his or her estate. Therefore, by keeping your house as part of your estate rather than gifting it or selling it, your children will inherit the property at its current market value as of the date of your death, without incurring a capital gains tax liability which can reach up to 28% of the fair market value of the property.  Assuming that your estate is valued below the allotted $5.34 million federal estate exemption mark, such a method could prove to be a valuable planning strategy to consider. 

Trust and estate attorneys can guide families through the difficult process of creating a will.  For more information about estate planning strategies, contact our experienced New York estate attorneys at Maroney Associates, PLLC.

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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