If you've got children or grandchildren on your holiday gift list, instead of just buying sweaters or electronic gadgets, try turning your year-end gift giving into smart estate planning, too.
Tax experts say that before 2010 comes to a close, many older Americans, retirees and well-heeled individuals can use several year-end gift giving strategies to take advantage of current, more favorable estate tax laws and plan for upcoming changes scheduled to occur in 2011.Under current estate tax rules, there is no estate tax or generation skipping transfer (GST) tax for those who die in 2010. The GST tax is typically imposed on large gifts you give to "skip persons," individuals who are more than one generation removed from you, like your grandchildren, or even great-grandkids.
But at the end of 2010, estate tax reform passed in 2001 is scheduled to expire, and Congress is still wrestling with what to do about estate taxes. Nobody knows, for example, what the exact
estate tax rate will be in 2011. Nor do we know how capital gains and dividends will be taxed.
"Planning during uncertainty is always a risky venture, especially if you guess wrong," said Justin Ransome, a partner in Grant Thornton's Washington National Tax Office. "However, if you
understand the reasons for uncertainty and are willing to take a chance, a little planning before the end of the year can yield great benefits."
Ransome offers these four, year-end gifting strategies that could help minimize your estate taxes while making your heirs substantially richer.
Be Generous With Cash or Assets
No matter what Congress does, you can reduce your estate by making annual (and sizable) cash gifts to any children, grandchildren or great-grandchildren. Even if major changes happen with estate taxes in 2011, annual gifting remains a cornerstone of good estate planning in 2010.
Currently, you can give up to $13,000 to an unlimited number of people, with no tax consequences whatsoever. If you're married, you and your spouse can each give $13,000 as gifts to your heirs or others, so that's $26,000 per recipient. All the money you give will be removed from your estate.
If you give more than $13,000 to someone, even though estate taxes won't apply in 2010, gift taxes do apply -- as much as 35%.
Pay Someone's College Tuition
Just like cash and other gifts of up to $13,000 are tax-advantaged, so too are payments of tuition to an educational institution for the benefit of your children or grandchildren. Such payments are excluded from gift tax.
Donate That Beaten Down Stock
The wild swings in the stock market this past year may have caused you indigestion. But, if you have stocks that have declined in value, giving those assets as gifts is a great way to minimize your estate taxes. By gifting stocks or any assets that are currently at unusually low values, you take advantage of depressed economic conditions and allow those assets to appreciate outside your estate, once the economy rebounds.
Pass Along Real Estate Now
Right now, for gift tax purposes, there is a maximum gift tax rate of 35% and an exemption of $1 million. Take advantage of your $1 million gift tax exemption by gifting property -- like real estate -- that has the potential to appreciate in value. Give it to your heirs now rather than at your death. Regardless of how much that property appreciates after you give it away, only the value on the date you give it away is used to determine your estate tax when you die.
If you give property to someone who is a "skip person," you are not subject to GST tax – but you still will be subject to gift tax. In 2010, the top gift tax rate of 35% is a relative bargain, considering the gift tax rate is set to surge to 55% in 2011. And even if Congress changes that,
most experts don't see lawmakers making the gift tax rate lower than it is is now.
It may sound morbid, but if you happen to die in 2010, there is no estate tax or GST for you or your heirs to worry about -- not unless Congress tries to do a "grave grab" and retroactively impose taxes on wealthy billionaires like George Steinbrenner and others who died in 2010. (Most experts say that's not not likely, given the large number of lawsuits that would no doubt be filed). So for now, in 2011, the estate tax and GST tax will go back to their year 2000 levels. Maximum gift, estate and GST tax rates return to 55% with an exemption of $1 million.
Again, just be aware that Congress could step in and change or tweak many aspects concerning estate taxes. So this is one area where it's best to talk to an estate planning specialist before you make any major moves.
You don't need an expert, though, to know that your heirs will thank you for a special year-end gift that could jump-start their finances in 2011 and beyond.