| Sargent & Lundy Savings Investment Plan |
| THE GENEROSITY OF GIFTS |
| The following excerpts are from an article in the October
1999 issue of "Mutual Funds" magazine. The opinions of the author,
Julian Block, may or may not reflect those of the SIP Committee.
The most obvious way to minimize taxes on your estate is to minimize the value of the estate. And the easiest way to do that is to take advantage of tax exemptions to give away as much as you can to family members or to others. Unlike donations to schools and other charities, income tax deductions aren't allowed for gifts to individuals. Nevertheless, these gifts can be advantageous. First, they reduce the value of your assets subject to estate taxes. Second, they shift income generated by the assets from you to family members and others who might be in lower tax brackets. Of course, you must carefully consider your future needs and those of your spouse. In other words, don't give away more than you can afford. Rules of the Gift Game The basic rule on gifts is that every individual can make tax-free gifts of up to $10,000 each year to an unlimited number of persons. Gifts can be money or other assets, including mutual fund shares, stocks, real estate, life insurance, jewelry, works of art, and so forth. You can also make additional tax-free gifts during your lifetime up to the unified gift/estate tax individual exemption. That exemption is $650,000 for individuals who die this year and rises gradually to $1 million for persons who pass away in 2006 and later years. Gifts beyond these amounts trigger gift taxes to the donor (the person making the gifts) at the gift/estate tax rates, which start at a hefty 37% and climb to 55%. There is no limit on the amount of tax-free gifts you can give to your spouse, provided he or she is a U.S. citizen. In IRS-speak, this is referred to as an "unlimited exclusion." But what the agency giveth, it can taketh away. An often-overlooked provision imposes a limit on the tax-free amount you can give to a noncitizen spouse. The cap is adjusted upward each year to reflect inflation. For 1999, it is only $101,000. It makes no difference whether your mate lives in the United States or not. The $10,000 annual gift exclusion amount is also indexed for inflation starting in 1999, but only in $1,000 increments. Hence, it will likely be several years before the per-person limit goes from $10,000 to $11,000. Strategies Paul Merriman, president of Merriman Capital Management in Seattle, Washington, used a single gift to ensure his grandson's comfort in his retirement years. When Aaron Merriman was born five years ago, Merriman made him a $10,000 gift which, after 30 days, went into an irrevocable trust that cannot be tapped until Aaron is 65. In 2059, if the market continues to yield an average 10% compound rate of return, that initial $10,000 will grow to nearly $5 million. Aaron will then be allowed to withdraw 7% ($350,000) annually. Assuming the principal continues to grow at 10%, the trust will be worth more than $7.7 million by the time Aaron is 85, even after the withdrawals. All those gains will be tax-deferred (taxable only upon withdrawal), because Merriman invested it in a variable annuity. Merriman constructed the trust so that anything left after Aaron dies will go to charity. The annual exclusion permits you to pass along as much as $10,000 a year to each of as many of your children, grandchildren, other relatives, or friends as you like. You can do so without 91) worrying about payment of gift taxes, (2) soaking up any of your lifetime exemption from gift and estate taxes, or even (3) telling the Internal Revenue Service. You must, however, use the $10,000 exclusions in a given year. You can't accumulate them or carry forward unused portions to future years. Your spouse can make gifts, too, effectively doubling the $10,000 figure to $20,000. If one spouse has most or all of the assets, the two of you can still give up to $20,000 annually to everyone. This is called "gift splitting," and it treats a gift of property owned by only one spouse as though half were given by the husband and half by the wife. It requires spousal consent, or course, and requires a brief form filed with the IRS. You'd be surprised how fast gifts can accumulate. A married couple using only their $10,000 individual annual exclusions can shift $2 million out of their estates over a 20-year period to five children or grandchildren. For even more impact, you and your spouse could also make annual $20,000 gifts to the spouses of your grown children. What if you exceed the yearly tax-free ceiling of $10,000 and have to disclose your generosity on a gift-tax return (IRS Form 709)? In most cases, the return need not be accompanied by payment of a tax on the gift. All that happens is that the IRS gleans from Form 709 that the taxable part of the gift reduces your $650,000 lifetime exemption. There is an immediate liability for gift taxes only if sizable gifts use up the entire exemption. It's wise to consult with an attorney, accountant, or other tax professional if you plan to make gifts that exceed the tax-free $10,000 cap. There can be myriad other tax-related issues, such as what property to give, when to make the gift, and who should receive it. Many people also learn the expensive way that they don't automatically reduce their taxable estates merely by giving property away. The IRS frequently challenges the validity of "gifts" if strings are attached, for example, when a parent "gives" income-producing property to a child but receives the income for himself. Extra Unlimited Exclusions You also have an unlimited exclusion - meaning you sidestep any liability for gift taxes - when you pay someone else's school tuition (not books, supplies, dormitory fees, board, or similar expenses, though they qualify for the annual $10,000 exclusion). Medical expense payments are also exempt. The recipient need not be a dependent or even related to you. To take advantage of these breaks, you must pay the educational institution or medical-care provider directly - not reimburse the person you want to assist. You lose the break when you turn money over to the person you want to help. This unlimited exclusion is an ideal estate-planning opportunity for grandparents. They can make tuition payments on a grandchild's behalf, for example, and still take advantage of the annual $10,000 gift exclusion. But the legally required payments you make in support of your dependent child - for tuition or medical care, for example - are not considered gifts. Qualifying medical expenses are the same ones that qualify for income tax deductions. But if you pay someone's medical expenses, be sure that person isn't reimbursed (by insurance, for instance). In that case, the payment is ineligible for the exclusion, and you are considered to have made a gift when he or she is reimbursed. Also, be mindful of the income tax deduction that might become available to your prospective gift recipient if that person makes the medical payment himself. |
This page updated on 9/10/99