Gifts you give during your lifetime are subject to federal gift taxes. For 2003, the top gift tax rate is 49%. It goes down to 48% in 2004, gradually decreasing to 35% by 2010.
You have not only a lifetime gift tax exemption ($1 million), but also the ability to exclude gifts of up to $11,000 per recipient annually ($22,000 if you and your spouse jointly make a gift or your spouse elects to split a gift with you on your gift tax return).
This exclusion is indexed for inflation every year, but goes up in only $1,000 increments — it rose to the current amount in 2002, but didn't change in 2003. To make such annual exclusion gifts, you must give recipients a “present interest” in the gifted property, which means they must have some access to the funds.
I first learned about myths while in elementary school studying the Greek gods. It may seem difficult to imagine that people actually believed those old stories, but old myths continue to have believers. Consider these about gift giving:
- They're not worth the effort
Many people flinch at dollar amounts such as $11,000 and $22,000, believing that annual exclusion gifts are simply not large enough. If giving away the full $11,000 or $22,000 seems unrealistic, remember every bit helps and over a period of years you can still do plenty of good for both your recipients and your estate. Used in connection with discounting as later discussed, this can be a very effective estate-shifting tool.
- They permit irresponsibility
Other people may dismiss annual exclusion gifts because of the idea of handing over cash (or other assets) to the average young person, or even an adult child or grandchild, may seem tantamount to throwing it away. But you can protect what you give. One way of doing so: a Crummey trust. This arrangement originated with the Crummey family, who wanted to create trusts for their relatives that qualified for the annual gift exclusion without granting recipients complete current access to those funds.
So language was inserted in the trust that allowed the beneficiaries a limited period in which to withdraw the trust funds — a provision known as a “Crummey” withdrawal power. If they did not withdraw the funds during this window of time, the assets remained tied up in the trust. Because beneficiaries retain a present (though temporary) ability to withdraw funds, gifts to Crummey trusts are eligible for the annual gift tax exclusion. As long as the funds remain intact, you'll accomplish your goal of restricting access to them.
- They forfeit control
Yet another group of potentially generous souls aren't necessarily concerned about lacking the funds to give or worried that their prospective recipients will squander these gifts. They reject annual exclusion gifts for fear of losing control of their funds.
But again, you needn't completely surrender power over your assets to give them away and reap the gift tax and estate planning benefits. For instance, by creating a family limited partnership (FLP), you essentially convert your estate plan into a family business with you acting as its general partner. As limited partners, your children (or grandchildren) are passive investors with no control over the assets. Therefore, you:
- Maintain sole responsibility for managing the limited partnership's underlying assets (including the business itself, or securities or real estate),
- Can continue to remain actively involved in its management throughout your lifetime, and
- Possess the ability to make gifts of limited partnership units, which qualify for the annual exclusion.
Moreover, because of limits on transferability, marketability and minority interests, FLP interests may be discounted for gift tax purposes. This allows you to make larger tax-exempt gifts of limited partnership units to your children (or grandchildren).
Let these myths go the way of the ancient Greek gods and let the truth guide you.
Don Ray is a senior member of the George B. Jones Dealer Services division of Dixon Odom, a national accounting and consulting group for dealers. He's at 901-684-5643 and [email protected].