Estate planning and gift tax question- (Alcorn?) - Posted by Ben (NJ)

Real Estate Investing
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Posted by SteveS(CPA) on June 17, 2001 at 18:13:11:

Ben,

OK. I guess I should have asked what your daughter’s age is? Because no part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in
property. Therefrom -
(1) may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and
(2) will to the extent not so expended -
(A) pass to the donee on his attaining the age of 21 years, and
(B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment.

With that said; I also have to tell you that the credit for 2001 is now $220,550 and for 2002 will be 229,800. Do you have to gift the entire amount to her this year? You can split the two between 2001 and 2002 using your credit in both years. Now this will decrease your lifetime gift amount and because it’s over $10,000 you will have to file a gift tax return.

Can you also tell me what the entity is, if the entity is a source that she will not receive a benefit for until the future she it may be exempt.

To tell you the truth, it would be wiser to talk to your accountant about this because I do not know your entire financial situation. And I could be giving you advice that is completely out of line.

I hope this help a little. Good luck

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Estate planning and gift tax question- (Alcorn?) - Posted by Ben (NJ)

Posted by Ben (NJ) on June 17, 2001 at 12:27:28:

As part of a long range estate plan, I want to move some assets into an entity where my two year old daughter
has an interest. One concern is gift tax. What is the rate for gift tax, does it vary? Are there ways around it, i.e, a trust with her as beneficiary?

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Estate planning - Posted by Bud Branstetter

Posted by Bud Branstetter on June 22, 2001 at 20:57:41:

Ben,

One of the reasons people use FLP/LLC for estate planning is that the IRS allows a discount for the limited interest. If you give cash it is worth the 1OK. If you give an interest in a limited partnership it could be 12.5K. The percentage discount is best determined by your advisors.

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Estate planning - Posted by Randy McKee

Posted by Randy McKee on June 19, 2001 at 24:03:59:

You might want to consider a section 2503 trust. This is typically called a child’s trust. It works like this:

You move the annual exclusion amount ($10,000) into this trust every year. You get to move that amount out of your estate for her benefit, but she does not get control of the assets inside the trust until she reaches the age of majority (or, if well educated on the subject even later in her life).

There are other very sophisticated strategies that we use all the time to accomplish these types of objectives. Let me know what you want to accomplish and I can probably help you.

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Re: Estate planning - Posted by JHyre in TexOhio

Posted by JHyre in TexOhio on June 18, 2001 at 16:41:55:

Ben-

Nothing for me to add…these guys covered things quite well. I am partial to LLC/FLP & gifting of interests therein…some of Nolo works on this are very good. For more technical, but precise, coverage, I would read ALI/ABA articles on the subject. ALI/ABA produces EXCELLENT collections of articles by THE experts on a variety of topics, including gift & estate planning.

John Hyre

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Re: Estate planning and gift tax - Posted by SueC

Posted by SueC on June 18, 2001 at 06:11:03:

Ben, my accountant recommends family limited partnership, but I understand that an LLC can be set up to do the same thing.

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Re: Estate planning and gift tax - Posted by SteveS(CPA)

Posted by SteveS(CPA) on June 17, 2001 at 15:05:58:

Ben,

Each taxpayer is allowed to give $10,000 ($20,000 for married joint filers) in
gifts to any single individual in the course of a year tax-free. This is a per-recipient
exemption, so (for example) a taxpayer wishing to give away $50,000 to her five
grandchildren could do so tax-free (if the gifts were split evenly) in 1997. This means that
the only way gifts can be taxed is if a single taxpayer gives more than $10,000 ($20,000 for
married joint filers) to another individual.

Credits: Most gifts and estate above the annual exemption are not subject to tax. This is
because each taxpayer is allowed a lifetime credit against taxable gifts and estate. In 1999, the credit amount was $192,800. Under the rate schedule the credit is equivalent to a $600,000 exemption from the gift and estate tax. This means that even if a taxpayer gives more than $10,000 to a single recipient in a given year, the gift amount above $10,000 will not be subject to tax unless this taxpayer has already given a total of $600,000 in taxable gifts since 1976.

Other Exemptions: There are some cases in which one can give more than $10,000 worth of gifts without facing the gift and estate tax. These include:

gifts to a spouse
gifts of paying tuition or medical expenses
gifts to political organizations (it figures)
gifts to charity.

Calculating the Tax: Any gifts or estate value left over when all exemptions and credits are taken into account is taxable. The tax rate ranges from 18 percent on the first $10,000 of taxable gifts and estate to 55 percent on taxable gifts and estate over $3 million.

[However, since the $192,800 credit has the effect of exempting the first $600,000 of taxable gifts and estate, the lowest rate that is ever applied is the 37% rate.] In addition, a 5 percent surtax is imposed on taxable transfers between $10 million and $21,040,000. Taxable estate value includes the value of all property owned at the time of death plus any gifts made in the three years prior to death.

However, this value is reduced by the value of debts, funeral expenses, and costs of administering and settling the estate. Finally, of course, any portion of a decedent’s estate that is given to a spouse or to charity is not taxed.

Hope this helps and I’m sorry it’s so technical, I guess that’s what accountants are for :slight_smile:

Steven

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Let’s use real world figures… - Posted by Ben (NJ)

Posted by Ben (NJ) on June 17, 2001 at 17:27:26:

I have two properties held in an entity which I am now the sole member. The market value of these properties
is about $ 400,000. Now let’s say I amend the entity
to add my daughter’s name as an officer with a 99% interest. From what you say above it appears the first $ 10,000 would be exempt, then the next $ 192,800 would fall under the credit? (Or is this credit only applicable to death?) Therefore, the remaining
$ 197,200 would be subject to gift tax, at 37%? Have I confused this whole process? Your help is greatly appreciated. I am an attorney also but taxes (other than property taxes) are definitely my weak point!

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Re: Estate planning and gift tax - Posted by Roger - TX

Posted by Roger - TX on June 17, 2001 at 16:36:31:

In 1999 the exclusion amount was $650,000. This year it is $675,000. Remember the total gifts for the year are $10,000. If you you already gave gifts for birthday, etc. you should subtract that amount from the $10,000 if you do not want to eat into your $675,000. I advise my clients to give $9,500. so the IRS can not say your gifts totaled more than $10,000, for te year.