In last week’s column we covered the basics of gift taxes and how they are in sync with estate taxes. Most of us will never have to worry about our heirs having to pay estate taxes for us at our death, since the estate exemption is $11.4 million.
When I die, provided my estate totals to less than that amount, no estate taxes would be due. For amounts in excess of the exemption, they are subject to an estate tax rate of 40%.
When spouses leave assets to spouses, there is an unlimited estate tax exemption. For example, if John passes and leaves an estate of $10 million to Mary, no estate tax is due at the John’s death. When Mary passes, her executor can take advantage of the portability feature of the estate tax exemption.
This provision allows the estate of one spouse to shift the unused federal estate tax exemption to the surviving spouse for use at the time of the surviving spouse's own death.
So, in our case, if Mary’s total estate had grown to $12 million, she would be able to use the $1.4 unused exemption from Joe’s estate, and her taxable estate would then be only $10.6 million. Consequently, her estate would not be faced with having to pay estate taxes.
Many parents make gifts to their children and doing so in amount not greater than $15,000 makes considerable sense if they have the funds. If you wish to make gifts to a minor child, there are choices: first, you could establish a custodian account at a bank or stock brokerage company under the Uniform Transfer to Minors Act or the Uniform Gift to Minors Act.
You would have to complete a form provided by the institution, and an adult must be appointed to serve as the custodian of the account. This could be you, your spouse or someone else you trust, your spouse, or a trusted friend or relative.
Here are some important points about such custodian accounts: the custodian will direct the investments of the account and withdraw funds for the benefit of the child. The withdrawn funds cannot be used for the support of the child that would be considered as the normal obligation of the parents.
If money were withdrawn for the child’s support, it would be taxed as income to the parents.
Income earned by the account would be subject to the Kiddie Tax, which just reverted to the “old” rules and above a small exemption, is taxed at the parents’ marginal tax rate.
Two other points: when the child reaches majority, the control of the account passes to the child. Another very important consideration is that gifts to a custodian account of this type are irrevocable-the parents cannot get the funds back for any reason.
We learned last week that the maximum deductible cash gift one can make to all qualified charities is 60% of your adjusted gross income. If you donate stock that you had held for one year or more, your deductible limit is 30% of AGI.
Finally, remember that if you are superannuated and want to give assets to your children, it might be wiser to forego that gift and simply bequeath those assets in your will. By so doing, your heir would receive a step-up in basis for the asset. At the subsequent sale of the asset by your heir, taxable gain would be based on the value of the asset at the date of your death, not the price you paid for the asset back in the halcyon days of yore.
