Many Ways to Give It Away

With the a tax credit sheltering lifetime gifts up to $5.34 million, few people will owe gift tax, but there are ways to give to family members that don’t even require the filing of a gift tax return.

Annual exclusion gifts – You can give up to $14,000 to any number of recipients in 2014; married couples can give up to $28,000.  If you give assets that are likely to appreciate, for example dividend-producing stock, you can shift income tax and capital gains tax to family members in lower brackets. 

Medical and educational expenses – If you’ve already given up to the $14,000 limit to children or grandchildren, consider paying their school tuition or medical expenses.  A grandparent can pay college tuition of any amount and owe no gift tax.  This is an excellent opportunity to assist children who are paying tuition for their children, and grandchildren, who might otherwise have to take out loans.  The payments must be made directly to the school or health care provider.

Interest-free loans – You can make interest-free demand loans to family members, up to $10,000.  The income earned on the funds while the loans are outstanding can be shifted to those in lower tax brackets.

Accelerate charitable bequests – You can combine a gift to a family member with a gift to support us.  An adult child who provides financial assistance to an elderly parent could fund a charitable gift annuity that would make payments to the parent for life.  The child would be entitled to an income tax charitable deduction, and a portion of the payment to the parent would be tax-free.


Teaching Life Lessons

What’s one of the best gifts to give a recent college graduate?  It might be the gift of financial advice.  Among the suggestions:

Insurance – Make sure they have health, car, homeowners' or renters' insurance.  Consider disability and life insurance, too.

Credit cards – Many graduating seniors already have significant debt before their first job, thanks to the use of credit cards in college.  It may be difficult to pay off credit cards and college loans on a starting salary, but it’s a worthy goal.

Saving for retirement – A recent grad looking forward to 40 years or more of work might not understand the importance of starting an early savings program, but a compound interest chart may help.  That $5,500 (current maximum for most taxpayers) contributed to an IRA or the funds put into an employer’s 401(k) plan – particularly if the employer matches a portion – will grow exponentially.  Even more important, it will set the graduate on the path to financial independence.

Philanthropy – Encourage the graduate to select a few favorite charities for giving back.  You may even want to provide matching funds, up to a certain amount, to make the graduate’s gifts go further.



Squeezing Cash from Collectibles

Whether you collect stamps, vintage postcards or paperweights, the day may come when you want to turn your treasures into cash.  Before putting the items up for sale, consider the tax consequences of owning and disposing of your collectibles.

  • Any gain on the sale of collectibles is subject to capital gains tax.  The top rate for items held more than one year is 28%, compared with 15% or 20% for the sale of stock.

  • Items sold at a loss generally don’t qualify for a capital loss deduction.

  • If the items are held until death, heirs take the fair market value – even if this is less than what the pieces originally cost.

  • A collection may be insured for loss due to fire, theft or other casualty, but if insurance proceeds exceed the price paid for the pieces, there will be a taxable gain.  The gain can be avoided, however, if the insurance payout is used to purchase like-kind property.

  • If a collection is given to charity, the deduction will be the fair market value of the items, provided they can be put to a use “related” to the charity’s mission.  Otherwise, the deduction is limited to the donor’s basis.  Items left to charity in a will qualify for an estate tax deduction equal to the full fair market value.

  • Collectibles contributed to a charitable remainder trust can be sold without loss to capital gains tax.  Sale proceeds can be reinvested to provide lifetime income to the donor or others, although the charitable deduction is calculated on basis, not fair market value.



Keep Living Trusts Alive

Revocable living trusts are often a valuable part of an estate plan.  In states where probate is time-consuming and costly, living trusts are almost a necessity.  But there are many things a living trusts can’t do.  For example, a living trust does not reduce taxes.  During life, all income is taxed to the owner, just as if the income-producing assets were held outright.  At death, the value of trust assets is included in the gross estate.

A living trust should be executed in addition to, not in place of, a will.  In your will you can name an executor, appoint guardians of any minor children and dispose of assets not held in the trust.  Your will can direct that assets are to be distributed under the provisions of the living trust.  Living trusts do not provide protection from creditors and are useless unless funded.

It’s possible to make gifts to charity from a living trust, entitling you to an income tax deduction, or to leave assets at death, qualifying for an estate tax deduction.

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The materials contained on this website are intended only to show some ways by which you can make a charitable gift or bequest and thereby minimize federal tax liabilities, as authorized by the Internal Revenue Code. All examples are of a general nature only and should not be applied to your specific situation without first consulting your attorney or other advisers.