The Wall Street Journal
Weekend Investor – Tax Report – August 18, 2012
The Gift That Keeps Giving
By Laura Saunders
Given the uncertainty surrounding next year’s taxes, here is a reassuring thought: One of Uncle Sam’s most useful tax benefits isn’t expiring, shrinking or otherwise under threat after 2012.
Experts call it the “annual gift exclusion.” It allows each taxpayer give anyone else up to $13,000 of assets per year, tax-free. There’s no limit on the number of gifts if they are made to different people, and recipients don’t have to be relatives.
The exclusion is in addition to the $5.12 million-per-individual lifetime gift-tax exemption, which is scheduled to drop to $1 million next year, unless Congress acts.
How it works. The annual $13,000 exclusion is per taxpayer, per recipient. However, married couples are allowed to “gift-split,” in which one partner makes gifts for both.
Say a couple wants to make gifts to each of three children and spouses, plus six grandchildren. The total allowable annual gift is $312,000 (12 x 2 x $13,000). The husband’s assets are tied up in a business, whereas the wife has cash, so she makes 12 gifts of $26,000.
The 529 gambit. Many would-be givers worry they will need the money. Gifts made to 529 education savings accounts for the benefit of others, often grandchildren, offer a rare win-win tax situation, as long as the giver owns the account.
That’s because gifts made to these plans are out of the giver’s estate, yet he or she can withdraw the amount of the original gift with no tax consequences if it is needed. (Earnings can also be withdrawn, but that incurs taxes plus a 10% penalty.)
Givers also can elect to make five years of annual gifts at once to a 529 account, as President Barack Obama and his wife did a few years ago.
Comments August 18, 2012
Say a couple wants to make gifts to each of three children and spouses, plus six grandchildren. Instead of making outright gifts they contribute to their 529 accounts (beneficiaries can be any age). The couple can each utilize the special five-year pull-forward rule, allowing each to contribute $65,000 in a single year. This approach significantly reduces the size of their estate and immediately shields it from future taxes. The total gift is $1.56 million (12 beneficiaries X 2 spouses X $65,000 per beneficiary).
It is important to note that the special five-year pull-forward rule can only be used again for the same beneficiary after the five-year period has expired. Unlike most estate planning solutions that remove assets from your estate and leave little control over investments and beneficiaries, the 529 allows owners to change investments and beneficiaries every year. Because 529 owners can name a successor to the account when they pass away, a 529 can be used for multiple generations – without taxation.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.