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How To Smartly Give Away Assets During Your Lifetime
By Chip Wieczorek, Financial
Advisor
Citi Smith Barney
400 Campus Dr.
Florham Park, NJ 07932
973-236-3569
http://fa.smithbarney.com/wieczorek
December 13, 2007
*Chip Wieczorek is the spouse of a Noah's Ark board member. We wish to thank him for this informative article.
How to Smartly Give Away Assets
During Your Lifetime
Giving
away your financial assets can be more complicated than just writing a
check. If you want to engage in lifetime
gifting of some of your assets, you should be aware of certain rules. For
instance, in 2007, the maximum annual gift tax exclusion amount is $12,000 per
person. The lifetime federal gift tax exclusion amount is currently $1 million,
and it will remain at that level through 2009.
The
top federal gift tax rate is 45% for 2007(the maximum that your heir may need
to pay on your gift). In 2010, the top gift tax rate will equal the top
individual income tax rate (currently 35%). Any portion of the gift tax
exclusion used will reduce dollar-for-dollar your estate tax exclusion
available at death. In light of all this, you may want to consider some
creative lifetime gifts. For one, charitable
trusts can offer you several financial benefits, including the potential
deferral of capital gains taxes, as well as possible gift and estate tax
savings. They may also serve as effective vehicles for transferring wealth.
A Charitable Remainder Trust is a tax-exempt way to distribute income from
the trust to beneficiaries for a period
of time after which remaining assets are distributed to charities of your
choice. You determine the time frame of the trust—it can last a lifetime or for
a fixed term of up to 20 years—as well as the amount of annual payouts. There
are some requirements that you should know about. First off, the annual payout
for the length of the trust or the life expectancies of the beneficiaries (which
would be you or your spouse) cannot exceed 50% or be less than 5% of the value
of the trust. And a private foundation or donor-advised fund may be named as
the charitable remainder beneficiary.
Highly-appreciated assets owned by the trust can also be
sold without an immediate capital gain, which may allow for an increase in
current income as well as income tax deduction. However, the type of assets
gifted and the type of charity receiving the gifts, as well as your adjusted
gross income, are all taken into consideration in determining your charitable
income tax deduction. What’s more, there may be income tax due on your annual
payouts from the trust.
Charitable Lead Trusts are funded with assets that are, preferably,
expected to appreciate. The charity of your choice receives a fixed annual
payout from the trust, and the remainder goes to your family members at the end
of the charity’s payout term.
Unlike charitable remainder trusts, charitable lead trusts
are not tax-exempt. However, tax implications differ between a grantor CLT and
a non-grantor CLT. With a grantor CLT, you are treated as the trust’s owner for
income tax purposes and are responsible for paying taxes on the income
generated. However, there is the potential to receive an immediate charitable
income tax deduction for a portion of your contribution to the CLT. In the case
of a non-grantor CLT, on the other hand, no upfront charitable deduction is
allowed for income tax purposes. However, the CLT itself receives a charitable income tax deduction each
year for the qualifying distribution it makes to charity. The primary benefit
of a CLT lies in its potential gift-tax advantages. The value of the donor’s
initial gift to the trust is determined by three factors: a government-set
interest rate, the length of the trust and the payout to charity. When the
government-set interest rate is low, the value of the donor’s gift is reduced
for gift tax purposes. So CLTs are particularly attractive in periods of low
interest rates.
The Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust allows you to pass assets you believe will
appreciate in value to family members at discounted levels. You contribute
assets to a trust and receive a fixed annuity payment stream for a specified
period of years. At the end of the trust term, the remaining assets and their
appreciation (if any) are distributed to your beneficiaries. Since the value of
the gift is reduced by the present value of the annuity payments, you could
structure a payment schedule and payout amount that could result in a minimal
gift-tax value. However, if you die
before the end of the specified term, some or all of the remaining trust
property would be included in your estate and subject to estate taxes.
Life Insurance
You could use life insurance to help replace your estate
and gift tax liabilities. Life insurance
often provides a substantial benefit for relatively small costs. A life insurance policy may be used by itself
to increase the size of your estate, or it may be used for cost-effectively paying
estate taxes. Plus, the proceeds of life insurance are typically income-tax free
to the beneficiary. And with careful planning, these proceeds may also be
received estate tax-free.
The Limited Liability Company or Family Limited Partnership
A Limited Liability Company or Family Limited Partnership
may help reduce the size of your estate for transfer-tax purposes. The LLC or
FLP is made up of managing or voting interests and nonvoting interests, and you
could gift the nonvoting interests to your children and grandchildren.
Since the non-voting interests gifted to your children and grandchildren lack
voting rights and are not readily marketable, they might be discounted for gift
tax valuation purposes.
The Dynasty Trust
A Dynasty Trust could allow you to establish a source of
funds for multiple generations. Here’s how it generally works: You would fund
the trust with an amount up to your and your spouse’s lifetime gift tax
exclusions. The trust assets, including any growth, will remain free of federal
transfer taxes (i.e., estate, gift and generation-skipping transfer taxes) for
as long as they remain in the trust. In
certain states, such as South Dakota,
the trust may theoretically last forever. And the plan could be designed so
that any distribution from the Dynasty Trust would be free of gift- and
generation-skipping transfer taxes.
Income or principal from the trust may be distributed to
your children, grandchildren and great grandchildren as specified in the trust
document. The provisions could tie those
distributions to incentives, such as maintaining gainful employment, and permit
distributions for funding businesses or purchasing homes for the use of
beneficiaries or other activities. There
also may be provisions in the trust document to gift a percentage of the assets
directly to a charity or family foundation. Assets remaining in the trust are protected from creditors and divorce
judgments.
Create Your Estate Plan
Discuss your estate planning objectives and concerns with
your Financial Advisor and your tax and legal advisors. Together, you can develop an estate plan that
best addresses your financial and familial situations.
Chip
Wieczorek is a Financial Advisor located in Florham Park, NJ
and may be reached at 973-236-3569.
Life insurance is medically underwritten. You should not cancel your current coverage
until your new coverage is in force. A
change in policy may be subject to additional insurance and investment-related
fees as well as increased risks, and may also require a medical exam. New surrender charges may be imposed with a
new contract or may increase the period of time for which the surrender charges
apply. Surrenders may be taxable. You should consult your own tax advisors
regarding tax liability on surrenders.
Citigroup Inc., its
affiliates, and its employees are not in the business of providing tax or legal
advice. These materials and any tax-related statements are not intended or
written to be used, and cannot be used or relied upon, by any such taxpayer for
the purpose of avoiding tax penalties. Tax-related statements, if any, may have
been written in connection with the "promotion or marketing" of the
transaction(s) or matter(s) addressed by these materials, to the extent allowed
by applicable law. Any such taxpayer
should seek advice based on the taxpayer's particular circumstances from an
independent tax advisor.
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FDIC INSURED · NOT A BANK DEPOSIT · NOT INSURED BY ANY FEDERAL GOVERNMENT
AGENCY · NO BANK GUARANTEE · MAY LOSE VALUE
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Smith
Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.
This
amount may be adjusted annually for inflation.
You
should consult with your legal or tax advisor about LLC or FLP planning and the
potential tax consequences. The IRS may
challenge this planning and take the position that gifted LLC or FLP interests
and/or underlying LLC/FLP assets are includable in the donor’s estate.
You
should consult with a qualified appraiser to determine the appropriate amount
of the valuation discounts.
Calculating
The “Cost” of Charity: Gifting Stock V.
Cash
By Chip Wieczorek,Financial Advisor
Citi Smith Barney
400 Campus
Dr.
Florham
Park,
NJ 07932
973-236-3569
http://fa.smithbarney.com/wieczorek
December 13, 2007
Calculating The “Cost” of Charity: Gifting Stock V. Cash
When making a
gift or fulfilling a pledge, you may want to consider using stock as opposed to
cash—especially if the stock has appreciated (a capital gain) and has been held
longer than twelve months. The reason is
because the net cost of the gift, after considering tax issues, may be less
when gifting stock.
Consider
the following example:
You
want to make a gift of $1,000 to your favorite charity. Instead of giving cash, you gift 10 shares of
a stock currently trading at $100 per share. You have owned the stock for three years, and your basis in the stock
(the original purchase price) is $10 per share; $90 per share represents a long-term
capital gain. If you were to sell the
stock, you would owe $135 in capital gains tax [$90 x 15% x 10 shares].* Since you pay no tax when you make a gift, in reality, your $1,000 gift
only costs you $865. A straight gift of
cash, on the other hand, would cost the full $1,000. Hence the stock is actually less expensive to
gift than cash.
There’s
a formula, though complicated, you can use to compute your “real” after-tax cost. For a gift of cash, the “cost” is equal to
the gift minus your income tax rate times the gift. If you’re in the 35% bracket, for example, your $1,000 gift will “cost”
Of
course, it’s probably much simpler just to calculate your potential capital
gains tax liability—and then subtract it from your gift. That’s what you’re really saving. Making gifts of appreciated stock rather than
cash can help save you money and help ensure your favorite charity receives the
funds you want it to have.
* This computation is for illustrative purposes
only and assumes a 15% capital gains tax
rate.
Citigroup Inc.,
its affiliates, and its employees are not in the business of providing tax or
legal advice. These materials and any tax-related statements are not intended
or written to be used, and cannot be used or relied upon, by any such taxpayer
for the purpose of avoiding tax penalties. Tax-related statements, if any, may
have been written in connection with the "promotion or marketing" of
the transaction(s) or matter(s) addressed by these materials, to the extent
allowed by applicable law. Any such taxpayer
should seek advice based on the taxpayer's particular circumstances from an
independent tax advisor.
Smith Barney is a
division of Citigroup Global Market Inc.
Member SIPC.
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