Distribute Assets   According to Your Plan   ... Not Uncle Sam's

With the holidays just around the corner, you might be feeling generous — and for estate planning purposes, now might be a good time to turn your generosity into tax savings.

From now until the end of the year, you can take advantage of the gift tax exclusion. For 2005, you're entitled to make an unlimited number of $11,000 gifts per recipient. Your spouse can do the same thing so jointly, you can give $22,000 to each recipient.

?????? What's in Store for the Estate Tax?     A question we frequently hear: Wasn't the estate tax repealed? Technically yes, but there are several strings attached to the repeal that might result in your estate eventually owing tax.     Under a tax law passed in 2001, the estate tax is scheduled to gradually be phased out by 2010. But there's a "sunset provision" that calls for everything in the law to revert back to prior law on January 1, 2011 — unless Congress acts to extend the estate tax repeal. The Senate was supposed to vote on a permanent repeal a couple of months ago, but after Hurricane Katrina hit the Gulf Coast, the vote was canceled.     So if you die before 2010, or lawmakers decide not to make the estate tax repeal permanent, your estate could be liable for tax. Here are the important figures to remember for 2004 and later years: Year Exemption Maximum Tax Rate 2005 $1.5 million 47% 2006 through 2008 $2 million 46% 2009 $3.5 million 45% 2010 no limit repealed

And the IRS just announced that the annual gift tax exemption will increase to $12,000 in 2006.

By giving away assets while you're alive, you can significantly trim the value of your taxable estate. That's beneficial if you've accumulated a fair amount of wealth. In 2005, the estate tax goes into effect when an estate has assets of more than $1.5 million. The tax rate is a whopping 47 percent on the net worth above $1.5 million. (Imagine your loved ones having to forfeit nearly half of your hard-earned savings to Uncle Sam!)

Under current law, the amount of assets subject to the estate tax and the tax rate are scheduled to be gradually phased out by 2010 and reinstated by 2011 (see right-hand box for more information).

So at this point, there are many unknown factors in estate planning. You don’t know when you'll die, how big your estate will be — and, of course, what the tax law will be at that time. To make matters worse, even though the estate tax is being phased-out, the gift tax is scheduled to remain in force with a $1 million exemption.

What will happen to the estate tax after 2010 is anyone’s guess, but many people expect Congress to reinstate it in some form. After all, 2010 is around the time the first baby boomers turn 65 and the demand on government resources such as Social Security and Medicare will increase.

In short, affluent individuals must still plan for the possibility of an estate tax and lifetime gifting can be part of a wise plan.

Some Advantages of Gifting

Future appreciation in the value of the gift will be excluded from your taxable estate. So if you give away an asset worth $10,000 now and at your death the asset is worth $50,000, a grand total of $50,000 escapes taxes.

You can evaluate your heirs' ability to manage money. Lifetime gifting gives you an opportunity to see how your children handle wealth. If they manage it well, you may feel more comfortable passing on more — either during your lifetime or when you die.

If you want to take maximum advantage of the annual exclusion in the near future, the approaching year-end is a perfect time. Let's say you and your spouse want to give your son at least $40,000 to help with a down payment on a house. Together, you give him $22,000 in December ($11,000 each for 2005). Then, on New Year's Day, you can give him another $24,000 for the 2006 tax year ($12,000 each).

Keep in mind that exceptions to the gifting rules do exist. For example, paying education or medical costs for another person is generally not a taxable transfer.

If you're interested in year-end gifts, don't wait until the very last minute. If a gift is made by check, it should be delivered and deposited by the recipient by December 31 to qualify for the 2005 annual exclusion. (However, the check can be paid by your bank in 2006.)

Stock Gifts 

Gifts of securities have somewhat different rules, but the $11,000 annual exclusion for 2005 still applies. If the stock has appreciated, when the recipient sells the shares, there will most likely be some capital gains tax. But if your tax rate is considerably higher than the recipient's, the tax bill will be a great deal lower.

With lower capital gains tax rates, now is a great time to give away appreciated securities to relatives in low tax brackets.

For instance, let's say your children or grandchildren are approaching college age. You can give each of them up to $11,000 worth of appreciated securities this year without any gift or estate tax consequences. If you’re married, your spouse can give away $11,000 to each child too. The recipients of your generosity can then sell the appreciated securities and pay only 5 percent capital gains tax, if they're in the 10 or 15 percent tax brackets. The sales proceeds can be used to cover college expenses. For this to work, however, you and the gift recipient must have a combined ownership period of more than one year.

Warning: This strategy can backfire if the child is under age 14. Why? Under the “Kiddie Tax” rules, some or all of the youngster’s capital gains may be taxed at the parents’ higher rate. Of course, that defeats the whole purpose.

If you're considering giving stock, you should know this: A gift of stock can be a wonderful thing, but it will be more wonderful if you provide a few facts the recipient will need later. If this information isn’t known, it can create problems when the recipient tries to sell the stock, which could be decades after you die. Take the time to provide these details with your gift:

 Your tax basis (cost basis) in the stock and the purchase date.

 The fair market value on the day you make the gift.

 The amount of any gift tax you might have paid on the appreciation of the stock.

As you can see, gifts made during your lifetime can make a great deal of tax-sense if your estate is large enough, compared with letting the assets be eaten away by estate tax. Still, not everyone is comfortable with the idea of giving away assets. You might be worried that you'll need them someday or you may feel your children aren't ready to manage the assets. Both are legitimate concerns. You may want to maintain your lifestyle years from now and not watch your children squander your savings.

Planned gift giving is not a do-it-yourself project. You worked hard to accumulate assets and you want to make sure they're handled properly. Consult with your estate planning adviser to help achieve the greatest tax savings while maximizing your wealth.