You have to be aware of the federal gift tax if you give gifts beyond the exclusion amount. This is a matter that is a bit complicated because of the unification of the gift and the estate taxes.
There is a $5.12 million exclusion so you can give gifts up to this amount free of taxation. But, since the gift tax is unified with the estate tax if you used up your entire exemption giving gifts while you are alive all of your estate would be subject to the estate tax.
There are however strategies that you can implement to pass along assets to your loved ones in a tax-free manner. One way of potentially doing this would be to create a grantor retained annuity trust and fund it with highly appreciable assets.
You as the donor will receive annuity payments annually out of the trust. You also name the beneficiary who would assume ownership of funds left in the trust after its term expires.
Since your beneficiary may be the recipient of an asset transfer the gift tax is applicable to the act of funding the trust. Interest is accounted for as well, and this is done by the utilization of 120% of the federal midterm rate that was in place at the time of the trust’s creation.
You arrange to receive annuity payments equal to the entire anticipated value of the trust. If the assets that you placed into the trust appreciate beyond the IRS estimated interest there will be a sum left over after the term expires. Your beneficiary will receive these funds free of taxation.
Should you be interested in learning more about grantor retained annuity trusts, take action right now to arrange for a consultation with a good Indianapolis estate planning lawyer.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.