I understand that each parent can gift $10,000 to each child without incurring any tax problems. Should the $20,000 total for two parents be given by two different checks or can it be done by one check from one parent? Instead could I simply transfer $20,000 to my brokerage account to my daughter's account?
$10,000 annual tax-free gifts are great estate planning tools, but you should be familiar with some of the mechanics to do it right. The amount though has increased to $11,000/year and is inflation adjusted. Answer: Let's give a few basic points first. Everyone can give to any number of people they want $11,000 per year without incurring any gift tax or using up any of their application exclusion. The applicable exclusion was $675,000 in the year 2000 increasing to $1,000,000 by the year 2006 but the 2001 Tax Act increased this. Now its $1.5M in 2004 and increasing to $3.5 million until repealed. Caution: State laws differ. If you give more than $11,000 in any year, you start to eat into your credit (except for front loading 529 plans). Once the credit is used up, you start to pay tax. The $11,000 amount is to be indexed for inflation, but has not yet gone up. You can make the gifts to anyone, not just children. There is no relationship restriction on who the gifts can be made to. Very importantly, many people also overlook the fact that they can give in addition to the $11,000 per year, unlimited payments for qualified tuition and medical expenses if paid directly to third party providers. Another big item people miss is not expressly defining who can and can't receive gifts or make gifts under a durable power of attorney. Where a husband and wife jointly give a gift, they can give $22,000 per year. If, however, one spouse makes the transfer of $22,000, the second spouse must elect gift-splitting. This requires filing a gift tax return and on the gift tax return splitting all gifts 50/50 between the two spouses to get the maximum deduction. If instead you simply write separate checks of $11,000 each from either your individual accounts or a joint account you both own, you probably are OK. This is certainly a better approach. You can also transfer securities from a brokerage account. Keep in mind when you do so, that if you transfer low basis securities (i.e. stock you did not pay much for that appreciated a lot) your child receives a carry-over tax basis. This means that if the child sells the stock, he is going to have the capital gains to pay. For many older clients, they prefer to hold highly appreciated stock until death when the basis steps up to the fair value thus eliminating the capital gains tax. In other instances, it might be more cost effective to gift appreciated stock to a child over age 14 (so the kiddie tax does not apply) so the child when he or she sells it will actually pay tax in a lower bracket than the parents. If you like to be a little extra careful, it can't hurt to sign a gift letter. This is a simple one paragraph statement indicating that you are making a gift in the current year to your child of whatever amount of money or description of the securities. Have it witnessed and notarized and save it in a file with a copy of the check with the brokerage documentation confirming the transfer. Caution: Gift and estate tax planning is extraordinarily complex. It can affect medicaid qualification, income tax issues, legal status, and so on. Whether the gifts should be made outright or in trust raises a whole host of new issues. Even if the rules sound simple, it is always imperative and worthwhile investing at least the time and money for a consultation with an experienced estate planning practitioner in your area before proceeding. Little slip-ups can create huge problems down the road. Don't fall prey to the idea "if its simple, I will just make outright gifts." Annual gifts, of even relatively small amounts, over many years can grow substantially. Do you want a young child or age 18 or 21 having access to significant funds that were intended to pay for their college? Or, would that beer drinking binge or a new car really make you just as happy as the sheepskin from an Ivy league school. Get professional help before proceeding.
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