The Strategist
1st Quarter 1995 - Volume 2 Issue 1
Tax-free annual exclusion gifts, $10,000 per donee, should be made as early in
the year as possible. Once a gift is completed, it is out of your estate. For
those in the 55% estate tax bracket, your estate saves $5,500 in taxes every
time you make a $10,000 gift.
The Treasury Department is opposing efforts
by members of the GOP to increase the Unified Credit. Generally, no tax is due
on a transfer (gift or bequest) of up to $600,000 (unlimited transfers to a
spouse without any tax). Married couples may be able to transfer up to
$1,200,000 without estate or gift taxes with proper planning.
There are two different GOP proposals to
increase the Unified Credit. The first proposal would increase the $600,000
amount to $700,000 beginning in 1996 with an increase to $725,000 in 1997, and
to $750,000 in 1998. Thereafter, the Unified Credit would be indexed to
inflation.
The second proposal would be for the Unified
Credit to be increased to $1,000,000. This could be a very significant planning
opportunity. If the Unified Credit is raised to $1,000,000, this would be the
same figure as the GST exemption. Therefore, a person could create a trust
during their lifetime or at death funded with $1,000,000. No federal gift or
estate taxes would be due.
Additionally, if the trust is structured
properly, children, grandchildren, and even great-grandchildren could receive
benefits (housing, education, income) from this trust without the trust being
included in their estates for tax purposes.
You have probably received mail from a
hospital, university, or foundation pointing out the tax advantages of
establishing a Charitable Remainder Trust (CRT). To briefly review, CRTs are
usually created when an individual has a highly appreciated but low yielding
asset, usually stock or real estate.
The general idea is for the individual to
establish a Charitable Remainder Trust and gift the stock or land to the trust.
The individual retains a stated income interest for his or her lifetime or even
the lifetime of the donor and his or her spouse.
The CRT sells the asset and pays no tax
since it is a qualified charitable trust. The trust then invests the funds and
pays a stated annual income to the donor or donor's spouse. The donor receives
a current income tax deduction for a percentage of the gift to the CRT. At the
death of the donor or last death of donor and generally, spouse, the CRT
terminates and pays all remaining assets to the charitable organization of the
donor's choice.
If you are considering this type of
arrangement, inquire with the ultimate charity about Charitable Gift Annuities
(CGAs).
CGAs are very similar to the Charitable
Remainder Trust arrangement, but can, in many circumstances, be more
advantageous. A CGA is a written contract between the donor (annuitant) and the
charity, usually a foundation. When a charity enters into a CGA, all assets of
the charity stand behind the annuity payments. Also, the payments the annuitant
receives are generally more tax favorable. Each payment has 3 levels of
taxation. The first level is a return of basis and has no tax. The next level
is taxed as a capital gain and is subject to the lower capital gains tax. The
third level is treated as ordinary income and is subject to ordinary tax rates.
Conversely, payments from a Charitable
Remainder Trust generally are treated as ordinary income. There is no return of
basis or capital gain. All payments are subject to ordinary income tax rates.
Therefore, taxes on payments from a Charitable Remainder Trust are generally
higher than the taxes on payments from a CGA during the early years. The
administrative requirements and expenses for a CGA are minimal compared to a
Charitable Remainder Trust. Many CGA agreements are only 2 pages in length
while Charitable Remainder Trust agreements can run into several dozen pages.
There is no chance to run afoul with the self-dealing restrictions using a CGA
while they can come into play with a Charitable Remainder Trust.
Another advantage of a CGA over a Charitable
Remainder Trust is the investment risk. Should the Charitable Remainder Trust
have below average or even negative investment return experience, the entire
principal could be depleted. In this case, not only does the charity not
receive anything, but the income stream to the donor will stop.
On the other hand, with a CGA, the charity
assumes full responsibility for investing your gift and all assets of the
charity stand behind their promise to pay the donor their income stream. Most
charities use annuity rates that are established by the Committee on Gift Tax
Annuities. Currently, these rates are not favorable. However, the committee is
scheduled to meet in May to establish new rates which should be in line with
current rates. The last time the committee met was in October of 1993. They
established annuity rates based on the interest rates in effect at that time.
This happened to be almost the very low point for interest rates and they
established rates that were correspondingly low.
As I mentioned, the committee will probably
offer rates that are competitive based on current interest rates.
Did you know that the IRS can value stock at
two very different valuations depending upon death or gift?
Many of you may be familiar with Revenue
Ruling 93-12. This ruling basically indicated that a minority discount can be
available for individual gifts of stock so long as no single gift represents or
exceeds 50% of the total stock outstanding. On the other hand, for estate tax
purposes, the value of stock is the aggregate amount of stock that the decedent
owned at the time of death. Gift tax is imposed on property that passes from
the donor to the donee.
The IRS has further ruled that the value of
the gift is the price at which the asset would change hands between a willing
buyer and a willing seller.
The IRS recently issued a technical advice
memorandum which involved a person that owned all of the shares of a
closely-held corporation. He made simultaneous gifts of equal value to all of
his 11 children. Each child received approximately 9% of the stock in the
corporation.
The IRS valued each individual gift as a
separate transaction allowing a minority discount rather than grouping all the
gifts together or aggregating the gifts to determine the value. In other words,
the sum of the various gifts were valued less than the whole corporation.
On the other hand, for estate tax purposes,
the shares an individual owns at death are aggregated together for determining
value. This is true even if the shares were to be distributed after the
decedent's death in a similar manner as described previously in the gift
example. If the decedent died owning control of the corporation then no
minority discount would be available for the block of stock the decedent owned
at the time of his death.
For example, assume Dad owns all 100 shares
in Dad's company. If Dad has 3 children, he could gift to each child 33 1/3rd
shares of his company. Since each individual gift is less than a controlling
interest, Dad can probably discount the value of the stock for gift tax
purposes. If Dad died owning all of the shares, the IRS would not allow a
discount for estate tax purposes even if his will directed that the shares be
left equally to his 3 children.
Once again the IRS has given you an
advantage (discount) if you gift assets during your lifetime rather than die
owning assets.
The
Wealth Transfer Group, Inc. is not engaged in the practice of law or accounting
nor are any of its employees, representatives, or agents. Tax and legal advice
should be obtained from qualified personnel.
(c) 1995 The Wealth Transfer Group, Inc.
283 Cranes Roost Boulevard, Suite 145, Altamonte Springs, Florida, 32701 (407)
339-5787
Links
| Home | More about The Wealth
Transfer Group, Inc.
Our
Mission | Newsletter Archive | Federal Estate Tax Overview & Table