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A simple way to transfer wealth

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William Hertzog

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Posted: Friday, August 24, 2012 4:42 pm

Thanks to the 2010 tax-relief legislation, the rules for estate planning are very favorable in 2012. This two-year window of opportunity provides the incentive to act now.

Lifetime gifts can be a simple, effective way to transfer your wealth to other individuals — provided you know the tax rules.

Here’s a brief overview of three opportunities you may want to consider that allow you to make transfers without any estate or gift taxes.

Annual exclusion gifts. Did you know you can give up to $13,000 per year to as many people as you like? And you can gift to anyone, not just family members. If you are married, you and your spouse can give $26,000 per beneficiary per year.

Annual exclusion gifts are attractive because they’re simple — no tax reporting is required. They reduce your taxable estate (potentially saving a 35 percent tax), and there are no lifetime limits, as long as you stay within the annual limits. Gifts to individuals are not taxable income to the beneficiary and do not create any income tax deduction for you.

Lifetime exclusion gifts. With this type of gift, you can make gifts above $13,000 per person per year, without paying gift tax, up to a $5,000,000 lifetime limit (this amount is scheduled to change in 2013).

Let’s say you give $100,000 to a family member. The first $13,000 is covered by the annual exclusion; the remaining $87,000 is applied to your lifetime exclusion.

If this was your first gift exceeding annual exclusion limits, you would have $4,913,000 of lifetime exclusion remaining.

When making this type of larger gift, you should keep in mind that a gift tax return is required. You must report the gift, but will not owe gift tax.

In effect, these lifetime transfers “use up” part of the exclusion that would otherwise be available at death to reduce your estate tax.

The key benefit is that if you transfer assets that appreciate in value, all of the future appreciation is removed from your taxable estate, although the recipient takes on your cost basis and holding period for income tax purposes.

Direct gifts (tuition and medical expenses). There are special rules in place for direct gifts of tuition or medical expenses. You can pay tuition or medical expenses for another person, without limitation.

These gifts do not count against the annual exclusion or lifetime gift exclusion. However, you must pay the school or medical provider directly.

Funds given to the beneficiary directly will not qualify. And “tuition” means just that — tuition only, not books, supplies, fees or room and board. No specific tax reporting is required, but as a rule you should keep good records.

Ultimately, it is your responsibility to be able to prove that your gift qualified under this rule.

• William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.

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