Now is the Time for Planned Giving

By Brenda K. Pavlak, CPA

Do you have planned giving in your future? Are there assets you wish to transfer to the next generation? In a down economy, when asset values are usually lower and the annual gift tax exclusion amount is higher, this could be the year to do it! 

In 2009, individuals can give away (gift) up to $13,000, gift tax-free, per donee. That means a married couple can gift up to $26,000 per donee. Do you have a married child that is considering purchasing a new house and would you like to help with the down payment? Here is a way to transfer $52,000 gift tax-free: a husband and wife can give a tax-free gift of $52,000 to a married child, with $13,000 going from each parent to the child and another $13,000 from each parent going to the child's spouse.

What to Keep in Mind When Gifting

 When giving gifts to others, there are a few items to keep in mind. First, for the annual exclusion amount to apply, the gift must be of a present interest. To determine if the donee has a present interest in the gift, figure out when the donee receives the economic benefit of the gift, not when title to the gift vests. Any restrictions that postpone the use or enjoyment of the gift, even for a short period, will make the gift a future interest gift.

Second, gifts made directly to medical or qualifying educational institutions are exempt from the gift tax. As long as your gift is a direct transfer or paid directly to the institution it will qualify and be gift tax-free. Other exceptions are gifts made to your spouse, political organizations or charities, and qualified disclaimers (these are transfers that are not considered gifts for gift tax purposes).

A gift given directly to the beneficiary is subject to the gift tax. A gift made to a college plan, such as a Section 529 Plan, is considered a gift to the beneficiary and subject to gift tax. One way to structure college funding in a 529 Plan and fall within the limits of the annual exclusion, for example, is to gift $65,000 and elect to have your gift spread ratably over five years, ($13,000 x 5 = $65,000). As long as no other gifts to that beneficiary are made during the five-year time period, only the initial gift tax return needs to be filed.

Third, a transfer to a trust creates two separate interests, the income interest and the remainder/principal interest. Income interest can be eligible for the annual gift tax exclusion, but certain criteria must be met. For gift tax purposes, a transfer to the trust is considered a gift to the beneficiaries rather than to the trust or trustee. Each beneficiary must satisfy the present interest requirement in order for the donor to claim an annual exclusion for that beneficiary's interest in the trust. The trust agreement determines this – usually income distributions are eligible but discretionary distributions are not.

Remember even small donations can be gifts. Monies given for weddings or bar mitzvahs are considered gifts and should be included when determining the annual gift tax exclusion. When paying for such events, consider paying the vendor directly because expenses that are paid directly to a vendor are payments for services or products and not considered gifts. 

If you are thinking about gifting or would like to transfer assets to the next generation, 2009 may very well be the year to do this. For more information, please contact Brenda Pavlak at brendak@ehtc.com or call her at 616-575-3482 to discuss the best strategy and structure for your gifts.