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March 16, 2017

What are the tax advantages of gifting?

You may enjoy significant income tax and estate tax savings with a properly structured gifting program. To understand the tax advantages of making lifetime gifts, you must understand what constitutes a gift and how it is taxed.

Generally, a gift is not taxable income to the donee (the recipient). However, any income earned by the gift property, or any capital gain on its subsequent sale, is generally taxable to the donee. You, the donor, may be responsible for paying state and/or federal transfer taxes imposed on gifts you make. There are four transfer taxes that may affect your gift giving: (1) state gift tax, (2) state generation-skipping transfer tax, (3) federal gift and estate tax, and (4) federal generation-skipping transfer (GST) tax.

The tax objectives of gifting are largely independent of each other, but they can also be inconsistent with one another (e.g., shifting income or capital gains may not be consistent with removing certain assets so you can qualify for special tax treatment). Be sure that the steps you take are consistent to accomplish your tax-saving goals.

Eliminate future appreciation from your estate

One of the most common reasons for gifting is to remove an appreciating asset from your estate. An appreciating asset is one that is increasing in value over time. Removing the asset today keeps any appreciated value out of your estate later. The amount that may be subject to gift and estate tax will likely be less today than it will be in the future.

Example: Darcy purchased some real estate for $150,000. Five years later, the property is worth $300,000, and she expects that it will double in value during the next five years. Darcy wants to give the property to her daughter, Ellen. If Darcy wants to save gift and estate taxes, she should make the gift now instead of later. Now, only the $300,000 will be subject to tax, and in five years $600,000 will be subject to tax.

Tip: Property that is likely to grow in value includes the cash value of life insurance, common stock, antiques, art, and real estate.

Lifetime giving results in the carryover of your basis (generally, basis is the property's cost) in the property to the donee (as opposed to a gift at death that usually results in a new basis of fair market value on the date of your death). This means that the donee may recognize a larger capital gain when the property is sold than the donee would have if he or she received the property from you at death. Be sure this consequence is acceptable before making this type of gift.

Take advantage of qualified transfers

Qualified transfers are specific types of gifts you can make that are exempt from the federal gift and estate tax, and federal GST tax. A qualified transfer is any amount you pay on behalf of someone else, either as tuition to an educational institution or to pay medical expenses to a medical care provider. This is a great way to help your children or grandchildren through college or to help your elderly parents get the proper medical care they deserve.

Take advantage of the annual gift tax exclusion

The annual gift tax exclusion is a federal exclusion that allows you to give $14,000 (in 2013 and 2014) per donee to an unlimited number of donees without incurring federal gift and estate tax or federal GST tax. This exclusion allows you to distribute your property tax free and potentially put your estate into a lower tax bracket. The exclusion applies only to gifts of a present interest in property. For example, giving your niece cash today would qualify, but giving her the right to have your house in three years would not. Only certain transfers in trust qualify, and the rules are slightly different for gift and estate tax and GST tax purposes.

Tip: If you are married, gift splitting can double the annual gift tax exclusion. Gift-splitting rules apply.

Tip: Some states may have the equivalent of the federal annual gift tax exclusion.

Take advantage of the gift and estate tax applicable exclusion amount and the GST tax exemption.

The federal gift and estate tax applicable exclusion amount is used to offset cumulative lifetime gifts and estates. The federal GST tax exemption works like the applicable exclusion amount for transfers made to skip persons (family individuals who are more than one generation below you and certain trusts for the benefit of such individuals). You may want to use the applicable exclusion amount and the GST tax exemption during your lifetime instead of waiting until your death because of the time value of money--money is worth more today than it will be tomorrow.

Some states may have the equivalent of the federal gift and estate tax applicable exclusion amount and GST tax exemption.

Remember: Tax that you pay on gifts made within three years of your death may be added back into your estate for estate tax purposes.


IMPORTANT DISCLOSURES This information has been prepared by Broadridge Investor Communication Solutions, Inc. Minis & Company (“Minis”) does not endorse the content provided, it is to be viewed for informational purposes only. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investments involve risk and an investor may incur a profit or a loss. Services and products offered through Minis and its affiliates are not insured by the FDIC, not a deposit or obligation of, or guaranteed by, the depository institution and are subject to risks including the possible loss of principal amount invested. Past performance does not guarantee future results. Prices and yields quoted are subject to change. Minis, its affiliates and subsidiaries, or its officers and employees may from time to time acquire, hold or sell securities or other derivatives related to such securities mentioned herein.

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