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Monthly Archives: November 2017

Nov 9, 2017 - Estate Planning

2018 Increase to The Annual Gift Tax Exclusion

The most commonly used method for tax-free giving is the annual gift tax exclusion, which allows you to make a gift of up to $14,000 (per donor, per donee, per year) on an annual basis to each donee with no gift tax and no reporting by donor(s) or donee(s). The IRS recently announced that this exclusion amount will be increased due to inflation to $15,000 effective January 1, 2018. There is no limit on the number of donees to whom you can make such gifts. If you make gifts to 10 donees in 2017, you can exclude up to $140,000 of such gifts from gift tax. In addition, if you are married you can double the amount of the exclusion to $28,000 per donee ($30,000 in 2018), because you and your spouse can combine your exemptions in a single gift from either of you. Your annual gift tax exclusion expires at the end of each year, and does not carry over into subsequent years, so the sooner in the year you take advantage of this type of gifting, the better. If you want to make a gift that exceeds the amount of the exclusion, you can effectively double the exclusion by making one gift in one year (before December 31) and the second early in the next year (after January 1). For example, if you are married, you can make a total tax-free gift of $56,000 to any individual by making a gift of $28,000 in December, 2017 and another […]

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Nov 7, 2017 - Estate Planning

The Power of Making Lifetime Gifts

A very effective strategy to employ in order to ensure that your estate will not be subject to estate tax is to make sufficient gifts during your lifetime so that at your death your estate is smaller than the then-current federal estate tax exemption amount. Your lifetime gifts above the annual exclusion amount are, however, subject to a gift tax that is imposed at the same rate as the estate tax. This “unified” system is intended to eliminate any tax advantage to making gifts. But certain types of lifetime transfers are not subject to gift tax. While many wait until year-end to make such tax-free gifts, any time during the year is a good time to do so, and the sooner the better. In separate articles, we discuss how to take advantage of the Annual Gift Exclusion; the Tuition Payment Exclusion; Section 529 Plans; the Medical Payments Exclusion; making Gifts in Trust; Charitable Gifts; and Making Gifts from your IRA. If you would like to discuss making lifetime gifts, please contact us to set up a free consultation.

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Nov 7, 2017 - Estate Planning

Taking Advantage of the Tuition Payment Exclusion

Section 2503(e) of the Internal Revenue Code of 1986 provides for an unlimited gift tax exclusion for payments of tuition made directly by a donor to an educational institution on behalf of a student for the purpose of education or training. This tuition payment gift exclusion is in addition to and separate from the annual gift tax exclusion limit for gifts made to the student. You may give unlimited amounts of money for tuition costs directly to a student’s college or university without incurring a gift tax. You may simultaneously give tax-free money directly to the student up to the annual gift tax exclusion (14,000 in 2017). If you have the choice of making either a tuition payment or an annual exclusion gift for a particular beneficiary, it will usually be better to make the tuition payment, because that will leave you the option of making an annual exclusion gift later in the year. Gifts made to a college or university on behalf of a student will likely impact the student’s eligibility for need-based financial aid. This is because third party payments for the benefit of a particular student made directly to a college or university are normally treated as cash support. This is a form of untaxed income to the student and should be reported as such on the Free Application for Federal Student Aid (FAFSA) and other financial aid forms such as the CSS/Financial Aid PROFILE. The U.S. Department of Education defines cash support in the Application and […]

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Nov 7, 2017 - Estate Planning

Benefitting from Section 529 College Savings Plans

Contributions to a Section 529 College Savings Plan (“529 Plan”) do not qualify for the exclusion for tuition payments, but can take advantage of the $14,000 (soon to be $15,000) annual gift tax exclusion. The contribution to the plan may also qualify you for a state income tax deduction, but only if the plan is sponsored by your state. Distributions from a 529 Plan can be used for a wide range of educational expenses, including tuition, fees, books, supplies, and room and board. An added advantage of a gift to a 529 Plan is that the income earned on the contribution is tax-free, as long as the contribution is eventually used for educational purposes. And because you can name yourself as the custodian of the account, you ensure that your beneficiary uses the account for educational purposes. There are two types of 529 plans: Prepaid Tuition Plans and College Savings (Investment) Plans. A Prepaid Tuition Plan locks in the current costs of tuition and protects against future increases in the costs of education. A College Savings Plan does NOT lock in current costs, but rather allows for savings to be applied against actual future costs, which will likely be much higher than current educational costs. College Savings Plans have grown in popularity and overtaken Prepaid Tuition Plans. In fact, several prepaid tuition plans have stopped accepting new enrollees or shut down entirely. This is because Prepaid Tuition Plans have drawbacks. For example, money put into a state-run Prepaid Tuition Plan […]

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Nov 7, 2017 - Estate Planning

Gifting Under the Medical Payment Exclusion

The payment of a beneficiary’s medical expenses is excluded from the gift tax, with no limitation on the amount excluded. To qualify for this exclusion, the payment must be made directly to the provider, and it must be for medical expenses that would qualify for an income tax deduction. You cannot claim an income tax deduction for the payment unless the payment is made for your spouse or dependent. The exclusion for medical payments includes the payment of medical insurance. If you have a child or grandchild who is paying for his or her own insurance, payment of their insurance premiums is an efficient means of making a tax-free gift that does not consume the $14,000 annual exclusion. Qualifying medical expenses are defined by reference to Code Section 213(d). See IRC § 2503(e)(2)(B). The exclusion applies to payments for (i) the diagnosis, cure, mitigation, treatment or prevention of disease, (ii) the purpose of affecting any structure or function of the body, or (iii) transportation primary for and essential to medical care. Treas. Reg. § 25.2503-6(b)(3). Payments for medical insurance are also covered. The Section 213(d) definition of medical care is extremely broad. It also covers long-term care services, such as the costs of nursing homes or assisted living facilities, if provided by a licensed health care provider. The most notable area it does not cover is cosmetic surgery, unless to correct a birth defect or disfigurement from injury or disease. See IRC § 213(d)(9)(A). Try to confirm that your donee’s […]

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Nov 7, 2017 - Estate Planning

Making Gifts in Trust

Despite the tax savings, you may be uneasy about making outright gifts to your children and grandchildren, due to the loss of control over when and how they use the gift. This concern can be addressed by making the gifts in trust, which will allow you to determine when they receive the money and how it is to be used. There are special requirements for ensuring that a gift in trust qualifies for the $14,000 annual exclusion. Usually, the trust agreement is drafted to provide the beneficiary with sufficient control over the gift that it is considered a “present” interest rather than a future interest. (This is called a “Crummey” Trust, named after the family that first successfully used this approach.) Although there is a risk of the beneficiary withdrawing the gift from the trust, the beneficiary should be dissuaded from doing so upon realizing that you will likely not make any further gifts to the trust. If you are interested in making a gift in trust, call us. We will be glad to explain how this is done and we have drafted many such Trust Agreements.

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Nov 7, 2017 - Estate Planning

Taking Full Advantage of Charitable Gifts

You should review your charitable giving to ensure that it is being done in the most tax-efficient manner. Charitable giving is an important form of estate planning. Gifts to charity are not (and never have been) subject to estate or gift tax. If you are planning to make a large gift, we should review its impact on your over-all tax liability and whether it may make sense to defer all or a portion of the gift to future years. The IRS requires an appraisal of the fair market value of certain gifted assets. The IRS states that: “The donor may not be allowed to claim fair market value for the donated property if the contributed personal property is put to unrelated use by the charity, or has a claimed value of more than $5,000, and is sold, traded, or otherwise disposed of by the qualified organization during the year of the donation, and the organization has not made the required certification of exempt use as outlined on Form 8282, Part IV.” “Unrelated use” means “a use that is unrelated to the exempt purpose or function of the charitable organization. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students the use is related. But if the painting is sold and the proceeds from the sale of that painting are used by the organization for educational purposes, the use is […]

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Nov 7, 2017 - Estate Planning

Making Charitable Gifts from your IRA

The tax law was changed in 2015 to permanently allow tax free Charitable Gifts from an Individual Retirement Account (“IRA”) by those over age 70-1/2. The law allows an “exclusion from income” of up to $100,000 per person, per year, for distributions made directly to charities by taxpayers over age 70-1/2. This change ended the uncertainty confronting tax payers for many years caused by Congress failing to enact “tax extender” legislation until very late in the year. Basic Requirements A direct charitable contribution from your IRA is deemed to be part of your Required Minimum Distribution (“RMD”). You can contribute more than your RMD to charity up to $100,000 in any calendar year. The gift can satisfy a pledge that you have made. You cannot receive anything of value in exchange for your contribution. The charity must give you a receipt stating the amount of the charitable distribution and that no goods, services, or benefits of any kind were or will be provided to you in consideration for the distribution from the IRA. The contribution cannot go to a donor-advised fund, supporting organization or private foundation. Finally, you cannot make a qualifying charitable IRA distribution from a Simplified Employee Plan (“SEP”) or a Savings Incentive Match Plans for Employees (“SIMPLE” plan) if the employer contributed to such plan during the year of the proposed gift. Gifts of Appreciated Long-term Capital Gain Property You may wish to forego a direct IRA charitable contribution if you could save even more tax on […]

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Nov 7, 2017 - Estate Planning

2018 Increase in the Federal Estate and Gift Tax Exclusion Amount

The current federal gift and estate tax “exclusion amount” (exemption) is $5,490,000. The IRS recently announced that, effective as of January 1, 2018, this exclusion amount will be increased (inflation-adjusted) by $110,000 to $5,600,000. This favorable change in the Federal Estate and Gift Tax law may have an impact on your estate plan. Please contact us if you would like to discuss the impact of this increase of the exclusion amount on your estate plan.

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