What to Consider when Gifting Assets

During the holiday season, the subject of gifts seems to be on everyone’s mind. But not all gifts are simple and straightforward to give. Some require specialized planning and have potential tax consequences you should be prepared for.

Gift Tax Basics

In the eyes of the IRS, a gift is essentially considered a transfer of the ownership of an asset. IRS Publication 559 discusses the regulations on gift taxes, but here’s a quick breakdown:

• The giver/donor generally pays the gift tax, not the recipient.

• The value of a non-cash, non-stock gift is found by determining the gift’s “fair market” value. Here is how the IRS defines fair market value: The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

• The annual exclusion varies, but for 2015 it is $14,000. That means that any gifts equal to or less than that amount are excluded from the gift tax. The limit is cumulative per recipient, so you could give 10 people gifts of $14,000 or less each and still avoid taxation. The exclusion for a married couple is $28,000.

• The lifetime exclusion is $5.43 million as of 2015. This is over and above the annual exclusion limits. Using this exclusion, however, will reduce the amount your heirs will be able to exempt from estate taxes.

• Payments made directly to educational institutions or medical providers on behalf of someone else are non-taxable as long as they are for qualifying expenses.

• Gifts made as charitable contributions may be deducted from your federal income taxes.


Gift Taxes and Life Insurance

Life insurance is a valuable financial tool because it offers a means of giving beneficiaries a large sum and avoiding taxes—but if you aren’t careful, there may be some tax liability. For example, if you own your own life insurance policy, then your estate may be taxed for its value upon death because of an “incident of ownership.” You might think that transferring ownership to your beneficiary is a good solution, but when you do that if the value of the policy at the time of transfer exceeds the gift tax exclusion, then they may be assessed a gift tax. The best way to avoid this is to transfer the policy to a trust, but remember, you need to do this soon since there’s a three-year, look-back rule. That means if the assets are gifted or transferred within three years of the donor’s death, they may be included in the gross value of the donor’s estate.


Gifting to Charities

There are many ways you can gift assets to a charity and receive not just a deduction, but even the tax-free return of principal as income. The first option to consider is simply naming a charity as the beneficiary on your life insurance policy. This is a great way to leave an important non-profit a substantial amount of money even if you don’t have the assets to do that on your own. Be sure you’re not listed as owner so, as discussed above, you can avoid any instance of ownership.

Another charitable gifting option is to fund a charitable remainder trust (CRT) with an annuity. When you do this, the annuity income paid during your lifetime may be tax-free. The charity gets the remainder of the trust assets after the donor’s death.

Gifting assets can be both generous and tax efficient. Talk to your advisor today to discover how you can benefit from strategic gifting while avoiding gift taxes.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or products may be appropriate for you, consult with your financial advisor.

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