Have You Made Your Tax-Free Gifts Yet?

As we approach year-end, the holidays are a fine time to share the wealth

By Lou Stemmler, MBA

One of the many benefits of amassing wealth is the opportunity to share it with the special people in your life. One of the burdens is the avoidance of sharing too much of that wealth with the government, both at tax time and when you shuffle off this mortal coil. The effective use of tax-free gifting can help to direct more of your wealth where you want it to end up.

There are three basic elements of gift tax allowances in the United States tax code. (Please note that we are simplifying here, and there is never anything simple about the tax code.)

  • The easy one, and the focus of this article, is the annual gift exclusion. Affecting gifts valued up to $14,000 for 2017, this annual exclusion can benefit any American taxpayer.
  • You can make payments directly to educational institutions and healthcare providers on behalf of loved ones for qualified tuition or medical expenses without tax consequences.
  • The big one, the lifetime gift exemption, which is $5.49 million for 2017, only pertains to those with estates worth at least, well, $5.49 million at the time of their death. There are, of course, complicating factors to this; if your estate is that size or larger, congratulations, but we strongly suggest that you get professional advice about how to best utilize and track your lifetime exemption. Furthermore, as we write this in late 2017, it looks like Washington will be changing this one, so keep an eye on the headlines (or keep in touch with your accountant).

Before moving on, let’s note that your author is NOT an attorney and this article should not be considered legal advice. It is our experience that attorneys lose the ability to speak plain English sometime during law school. In our attempt to simplify these complex topics, I’m confident that we’ve already set trust and estate attorneys’ heads spinning with our casual use of some of their lingo (and we haven’t even used any Latin terms yet). Nonetheless, we intend to offer useful information that, at a minimum, should strengthen your knowledge and better prepare you for any pertinent dealings with your attorney.

Annual Gifting

Families and individuals can make effective use of the annual gift tax exclusion. For 2017, that means that you can make gifts to as many individuals as you wish of up to $14,000 in value each. The gifts can be cash, stock, gold coins, a car (presumably used), or Aunt Bessie’s Hummel figurines, as long as the fair market value of each gift does not exceed $14,000. Married couples can combine their gifts to double the exclusion to $28,000 for each recipient. (For those planning ahead, the I.R.S. has announced that the inflation adjusted annual exclusion goes up to $15,000 for 2018.)

Benefits and some considerations:

  • This is a simple way for parents and grandparents to provide support to their children and grandchildren.
  • If you DO possess sufficient assets to be subject to estate taxes when the time comes, annual gifting is a useful tool for moving assets out of your estate without tax consequences.
  • Annual gifts made under this exclusion do not count against your lifetime gift exemption.
  • The cost basis of stocks and other gifts usually travels with those gifted assets, meaning that the recipients may have to pay capital gains taxes if and when they sell the asset.
  • Parents and guardians of minor children should research the benefits of applying their children’s gifts to a trust benefitting those children, rather than a Uniform Gifts/Transfers to Minors Account (UGMA or UTMA), which usually turns over all the assets to the child at age eighteen. This could also lessen the child’s eligibility for student loans and scholarships.

In our family, year-end has always been the time for dealing with annual gifts, donations, and other matters of financial maintenance; perhaps that can work for your family, too!
For more information on gifting, here is the link to the I.R.S. FAQ page.

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So, What IS a Trust, Really?

It isn’t actually that complicated.

By Lou Stemmler, MBA

“Trusts are only for the rich.”

“Only expensive lawyers understand trusts.”

In our dedicated effort to disprove such thoughts, we offer you some very basic answers to our titular question. We hope to help you decide whether you might benefit from the use of a trust, and to give you a working grasp of the basic mechanisms and terms involved.

When it comes right down to it . . .

A trust is really just taking something someone owns, putting it inside a sort of box (sort of like a treasure chest!), and deciding who manages what’s in the box and who gets the benefits of what’s in the box, and when. Now, there are lots of ways to make one or more of those elements more complicated, but that’s really what’s going on when you are dealing with just about any kind of trust. Whether Great-Uncle Phineas wants to ensure that his cat is taken care of after his death or Mrs. Winterbottom wants to endow the third clarinet at her local symphony, a trust can be a very useful tool.

A Simple Example

Let’s say that John wants to leave $25,000 to his grandson, Charlie. However, John thinks it best that his grandson not receive that money until Charlie has reached the age of 25. John can establish a simple trust that will hold that $25,000 safely – and out of reach – until Charlie’s 25th birthday, at which time the money is provided to Charlie and the trust ceases to exist. (And no, your author is not an attorney; most attorneys would have popped multiple gaskets trying to offer such a simple example. There are MANY possible details and complexities to layer onto this little scenario, and the reader should definitely consult with an appropriate trust expert to ensure that their own needs are met. When you do so, we hope to have equipped you with a better grasp of the mechanisms and terminology an attorney may aim your way.)

Some Lawyer-Speak

Since John is the one creating the trust and granting the funds, he is known as the ‘Grantor’. Other possible labels are the ‘Trustor’, ‘Settlor’, ‘Donor’, and ‘Benefactor’, though the last two don’t necessarily mean that there is a trust involved. So, as the Grantor, John creates the trust document (usually with the help of an attorney) and places into the trust his $25,000, known variously as the ‘Body’, ‘Corpus’ (Latin for ‘body’), ‘Principal’, or ‘Trust Res’ (‘res’ is Latin for ‘thing’; the more Latin, the higher your legal costs . . .).

The person or entity designated to control and maintain the stuff in the box, er, um, the Corpus of the trust, is the ‘Trustee’ (there can be more than one). John can name himself as the Trustee, or he can designate one or more individuals and/or a corporate entity (often a bank) for this job.

Then, on the receiving end of the trust is the Beneficiary (the one who gets the benefits), in this case, John’s grandson, Charlie.  A trust can have more than one beneficiary, and can arrange for different beneficiaries to receive different benefits from the trust, perhaps at different times.  In this example, John is keeping it simple, right down to the official name of the trust: “The John Q. Smith Trust Dtd (‘Dated’) 10/10/2018 FBO (‘For the Benefit Of’) Charles Q. Smith”.

Bringing the Trust to Life

Once John has created a written document that specifies the terms of the trust to his satisfaction (again, usually with the help of an appropriate attorney), John signs the document with witnesses as the applicable trust laws specify.  However, even after signing, the trust doesn’t actually exist until there’s something inside the box.  John has to fund the trust with, in this example, $25,000.  Whether John must provide cash, securities, or gold bullion as the corpus of the trust may or may not be specified in the terms, as well as whether and how the funds are to be invested.  The trust might also specify exactly how and in what form the $25,000 is to be provided to Charlie when the time comes.

Typically, John would place the funding into a trust account at a bank, brokerage, trust company, or other corporate entity.  There are considerations, consequences, and costs associated with this choice, as well as with the terms that define how the trust assets are managed.
Furthermore, while we’re working hard to keep this simple, a thorough and well-written trust will specify back-up plans and contingencies that attempt to cover the kinds of surprises that can arise as life happens between trust creation and Charlie blowing out 25 candles.  This challenge of covering all the possibilities can make even “basic” trust documents run to the length of a novella, but without the pleasures of a plot, characters, or even readable English.  Nonetheless, it’s worth getting the document right so that the trust will achieve the Grantor’s goals, rather than creating headaches and more attorney fees.

Placing Your Trust in a Trust

Trusts are very useful, and can be very powerful tools.  A good trust can provide convenience, protection, support, and security to loved ones and beloved institutions.  However, there can be many complexities involved in almost any situation involving a trust.  Unforeseen circumstances could affect your assets, your taxes, and even your relationships with those close to you.  In the many situations when trusts are worth doing, they’re worth doing right, so we strongly recommend getting assistance from a qualified attorney.  Know what you want to do, know how and when you want it done, and maybe learn a Latin term or two, and your dealings with your attorney will be more effective and less costly.

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