Spreading out wealth transfers to lower tax liabilities

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Wealthy clients who want to bequeath more than $5.43 million -- the threshold that kicks in for estate taxes -- should consider spreading out their gifts to heirs while they are still living.

Each year during their lives, clients can give up to $14,000 per person to as many people as they want before they have to pay gift taxes, says David D. Holland, chief executive of Holland Financial Inc. in Ormond Beach, Fla.

They can even do this for years and hit the $5.43 million threshold, and there will be no estate taxes for either party.

“If a client has a rapidly appreciating portfolio or owns property that’s rapidly increasing in value and they don’t need the money, then they can take advantage of the gift exemptions to move that asset to their heirs,” Holland says. “Often, wealthy clients will also use the annual $14,000 gift to buy life insurance that’s held in an irrevocable insurance trust outside of their estate.”

It is important to be mindful of any expenses already paid for that individual, as those would count toward the annual $14,000 limit, says Kevin J. Meehan, regional president at Wealth Enhancement Group in Itasca, Ill.

Clients can consider granting loans to heirs, but to be valid under Internal Revenue Service rules, a loan document must be drafted stating the terms of the agreement and acknowledged by both parties, and the minimum interest rate proscribed by the IRS must be charged, Meehan says.

“This needs to be treated as a legitimate loan with regular payment, accruing of interest and enforcement in order to avoid being treated as a ‘gift in disguise’ by the IRS,” he says.

Clients can also consider giving money in other ways to lower tax liabilities, including through Coverdell education savings accounts, which are tax-advantaged savings vehicles for education-related expenses from kindergarten through college, Meehan says.

Up to $2,000 can be placed annually in a CESA for an individual. Any contribution exceeding this limit will result in a 6% excise tax.

A Section 529 college savings plan can also be a useful tool to save for children or grandchildren’s higher education, Meehan says.

With this type of savings plan, the IRS allows an individual to gift up to five years’ worth of contributions to a beneficiary at one time without triggering a gift tax exemption. This year, the tax exemption is $14,000, which means that an individual can contribute up to $70,000 at one time.

“Contributions can also be used on multiple beneficiaries in the same year,” Meehan says.

“In this instance, a gift tax return would have to be filed,” he says. “However, no gift tax would incur as long as there are no other gifts to that individual over the next five years.”

Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.

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