As clients prepare for tax season, it is an opportune time to talk about the rules for gifting assets to family members as well as giving to charities. There are several strategies clients may want to consider to make the most of their gifts.
Make a gift to family members
For clients considering gifts to family members, this year may be a good time, even if asset values have depreciated. The asset’s value may result in a lower completed gift now, but after the gift is made it becomes free of gift and estate taxes, providing more attractive potential for long-term appreciation. It is also important to remind clients of the annual limitation for tax-free gifts to family members: $13,000 per individual per year for 2011 and 2012.
Set up a Grantor Retained Annuity Trust (GRAT)
GRATs can be used to transfer assets to family members free of gift and estate taxes. GRATs are typically established for a term of two to five years. During that time, annuity payments are made to the grantor until the principal plus an assumed interest rate, set by the IRS, have exhausted the trust. Any income earned above the assumed interest rate is passed on to the beneficiary free from gift or estate taxes.
Contribute to a grandchild’s college savings plan
For clients who contribute to a grandchild’s 529 plan, a special gift tax exclusion enables them to make five years’ worth of gifts to a single beneficiary, in a single year, without triggering the federal gift tax. The maximum amount allowed by the provision for 2011 is $65,000 for individuals and $130,000 for married couples. In some cases, contributions to the account can be removed from an estate for tax purposes, and the grandparent can retain control of the assets. Additionally, assets held inside a grandparent-owned 529 account are not currently included in the calculation for federal financial aid.
Instead of taking an Individual Retirement Account (IRA) distribution, donate to charity
Charitable giving by individuals rose 2.7% in 2010 and charitable bequests rose 18.8%, according to philanthropy research organization Giving USA. That upward trend continued this year, and it’s likely many of your clients are going to maintain, or even increase, their charitable donations this year.
Clients who are 70 1/2 may want to make a donation to charity from their IRA, rather than take a required minimum distribution. This special provision, which allows investors to donate up to $100,000 to charity from their IRA, expires at the end of 2011.
For more information, download our Donating IRA Asset to a Charity investor education piece.
Philanthropy and legacy planning are important consideration for many clients. Providing them with the latest information about rules, limitations, and tax benefits is valuable advice, especially in the season of giving.