Schlagel Gordon & Kinzer, LLC

An individual is currently allowed to gift $12,000.00 in cash or other property without gift tax consequences every year (this is generally referred to as the Annual Exclusion Amount). Any individual can make these gifts to as many people as they wish, so long as gifts to each person are limited to the $12,000.00 Annual Exclusion Amount per calendar year. In addition, an individual can gift cash or other real or personal property tax free over their lifetime up to $1,000,000.00 without paying gift tax; however, gifts exceeding the $12,000.00 Annual Exclusion Amount in any year do require the preparation of a tax return. The Annual Exclusion Amount, gift planning future interest gifts and those gifts exceeding the Annual Exclusion Amount can create a wide array of attractive estate planning maneuvers which clients frequently take advantage of. For more information on how to benefit from gift planning techniques, contact SGK.

The concept of “basis” is necessary to understand as it is often a very important component of understanding potential estate tax consequences and aids in estate and general tax planning. Cost basis is generally the amount paid to acquire an asset. In the gift tax arena, cost basis is important in determining the value of a gift that is subject to potential taxation. There is a federal limit to the amount of money you may gift in your lifetime without incurring a tax. Currently, for 2008, an individual can gift up to $1,000,000.00 without paying a tax (albeit filing of informational tax returns is necessary). Married persons can combine exempted gifts, thus allowing gifts of $2,000,000.00 during a lifetime. Generally, when you gift property during your lifetime, it will be assessed for tax purposes based upon the fair market value of the gift when made and the recipient of the gift acquires the maker of the gift’s tax basis. When the person receiving the gift later sells the property, if it is sold for more than the transferred cost basis, the seller is taxed on the amount representing the difference of the sale price and the transferred cost basis. Property that is held until death will have any appreciated value revalued at a new stepped up value as of the date of death. This creates very good tax planning opportunities and often is the basis of decisions to hold real property until death to avoid all capital gains tax associated with appreciation in real property when it is passed on to a person’s heirs. Basis comparison may seem complicated, but with the help of SGK, clients can sort though planning obstacles and opportunities emanating from the way in which the tax code treats basis.

There is no investment quite like a charity for those clients who are charitably inclined. The returns are felt through the heart and society, as gifts to charities make a difference in other’s lives. Many clients prefer charitable giving as a tax planning opportunity since it enables them to promote the welfare of their selected charities and eliminate income and estate tax, thus removing the concept of government controls to distribute tax dollars. Importantly, donors who make charitable gifts can deduct certain portions of their contributions from income tax and can receive annuity income in return for certain gifts during their lifetime. Planning is likewise available to purchase insurance products as part of charitable gifting, in order to replace the loss of wealth that results from the gift with insurance monies which will be later received tax free by a client’s heirs.

Currently, nine states and Puerto Rico have community property laws. Neither Kansas nor Missouri are community property states. This means, in a marital context, that most property and assets created and/or purchased are owned jointly, unless the partners in the marriage agree otherwise. To claim property as community property, you must live in a state with community property law and you must be married. Common law marriage may or may not constitute a legal marriage in these states. Before you can claim community property without the benefits of a marriage ceremony, you should make sure that the state recognizes common law marriage and under what conditions. Most states provide that a spouse can leave half of his or her community property by will to anyone.

Capital gains are the income received or earned from the sale of certain investments or properties. When a stock, for example, is sold for a profit, capital gains are the difference between the net sales price of the security and its net cost, or original basis. If a stock is sold below cost, the difference is a capital loss. When you defer capital gains, you essentially report the earnings on a kind of installment basis. Properly structured, you can defer a profit from the sale of a business or stock over a number of years.

The unified federal gift and estate tax kicks in if the sum total of gifts made prior to death and/or the gross value of your estate at the time of your death exceeds a certain amount. The gift tax credit is currently limited to $1,000,000.00. The estate and gift tax combined credit amount is $2,000,000.00 in the year 2008, $3.5 million in 2009, unlimited in 2010 and returns to $1,000,000.00 in 2011. Each year you are permitted to make Annual Exclusion Gifts of $12,000.00 per donee without affecting your available unified credit amounts. At SGK, we work with client estates of all sizes to reduce and/or eliminate the imposition of estate and gift taxation by maximizing the available credits and through gift planning techniques. Among the frequent estate and gift tax planning methods used by SGK, we do a significant amount of A-B Trust planning and we employ a variety of asset value reduction planning techniques by taking discounts in the value of real property for fractionalization of interests and minority interest discounting.

Gift planning may afford certain individuals significant tax savings in the right circumstances. By maximizing the use of Annual Exclusion Gifts, a person can remove significant wealth and wealth appreciation from his or her estate without dipping into the available estate and gift credits. Additionally, a common technique is to gift property away that may stand to appreciate significantly (land or securities) with a view of allowing the asset to be removed from the estate when its value is low for purposes of using a portion of the gift tax exclusion and thereafter allowing the asset to see its appreciation in the hands of the recipient of the gift. Alternatively, certain appreciated property should not be gifted due to the potential loss of step up in basis that currently results if property is held until death. Gifting techniques are among the many planning tools SGK will utilize when evaluating your estate plan.

Joint tenancy is a term of art designating that property ownership is common as to all parties listed as joint owners on an account or other titled property. Joint tenants have one and the same interest, accruing by one and the same conveyance, commencing at one and the same time, and held by one and the same in undivided possession. In essence, each owner has the unrestricted right to access an entire account or property and it takes all owners and their spouses to sell the account or property, as each owner is deemed to hold an undivided interest in the entire jointly held asset. Any titled real or personal property can be held in joint tenancy and this can be a convenient, but risky, tool to avoid probate. In certain circumstances, the Pay on Death (POD) or Transfer on Death (TOD) account is a more common estate planning resolution. By the use of joint tenancy, avoidance of probate may stem from certain rules, that vary from state to state, which specify that when one tenant dies, the others receive the property automatically. Probate avoidance occurs as joint tenancy property is not generally subject to the probate or other legal process. Provisions in wills or trusts do not affect property properly designated as “joint tenancy with right of survivorship and not as tenants in common” or property designates as POD or TOD. Rather, on the death of any joint tenant, the entire tenancy remains to the survivors, and ultimately to the last survivor. There can be significant risks in using joint tenancy as an estate planning device that are not present with POD or TOD planning or other trust and estate planning. For instance, if property is titled with a parent and two or more children for probate purposes only (i.e.: the child does not use the account and does not normally contribute to the account) and one of the children predeceases the parent, the grandchildren by that predeceased child could be disinherited. It is not uncommon for a joint owner to misuse an account of this nature and it is difficult to hold them accountable for such misuse because they enjoy legal title to the property so designated as joint property. Moreover, if a child becomes subject to a creditor or bankruptcy problem for any reason, the child’s creditors may attempt to garnish the entirety of a joint account under the theory that the account is owned by the child.

The unlimited gift and estate tax marital deduction permits spouses to transfer all of their wealth between themselves free of estate or gift tax. In a situation where spouses have an estate greater than the unified credit amount ($2,000,000.00 in the year 2008, $3.5 million in 2009, unlimited in 2010 and $1,000,000.00 in 2011), an A-B trust to ensure that each spouse makes full use of their respective unified credit should be considered, as, without A-B trust planning, the marital deduction will have the effect of eliminating the unified credit amount in the estate of the first to die. For instance, in an estate valued at $4,000,000.00 in 2008, in the event no A-B trust plan is in place and a death occurs, the unlimited marital deduction will remove any estate tax from being occasioned in the estate of the first to die, but the survivor will only have the benefit of his or her unified credit amount, which would make the gross estate taxable to the tune of $2,000,000.00 in 2008, $500,000.00 in 2009, non-taxable in 2010 and $3,000,000.00 in 2011 and beyond. In the event a fully funded A-B trust plan were in place, each spouse’s estate will be sheltered to the extent of the full unified credit for each spouse, not just the surviving spouse.

Payable on death accounts (PODs) and transfer on death accounts (TOD’s) are statutory devices by which titled property can be passed at death to avoid probate. Unlike joint tenancy property, the beneficiary or recipient to whom the POD and TOD ultimately is paid to on the death of the owner of the titled account maintains no interest, and therefore cannot access the account until the death of the owner. Hence, the serious issue of potential misuse or risk of a joint tenant’s creditors garnishing an account is not a problem in a TOD or POD setting. Further, you can make more effective designations of who receives property with a TOD or POD than can occur in a joint tenancy setting. Provisions in wills or trusts do not affect property properly designated as POD or TOD property and, hence, their usefulness in non-taxable estate is prevalent.

If you become sick or disabled, it is important to protect your assets and the rest of the property that makes up your estate. If, for example, you have to enter a nursing home, you should know they will treat you like any other for-profit private institute – you are expected to pay. While some costs may be handled by Medicare, which everyone older than 65 is entitled to, other costs may be handled by private insurance or your personal assets. If Medicare or Medicaid determines you have too much personal wealth to be eligible, you may end up paying for your nursing home stay out of your own pocket. There are various strategies to spend down resources and qualify for public benefits while protecting some of your assets from state and federal agencies in these circumstances. The rules are very complex so it will be important to talk with an attorney to determine what options might be available to you.

Tenancy in Common is a form of ownership of property whereby each tenant (i.e., owner) holds an undivided interest in property. Generally, each person controls an undivided portion of property and can sell it to anyone. The portions of property held in common can be of unequal sizes. Unlike a joint tenancy, the interest of a tenant in common does not terminate upon or prior to death. The interest held by the deceased tenant in common will pass to his or her estate or heirs at law.

A closely held business is usually one that is owned by one person or among spouses, rather than a business which is owned by multiple individuals in a corporate or a conglomerate setting. Transferring a closely held business generally means that the person(s) who owns a business is either giving it to someone else or selling it. Generally, gifting a closely held business involves transferring ownership to a family member, such as a spouse or child, in a manner that is tax savvy and estate and gift tax sensitive. Selling a closely held business usually involves an arm’s length transaction in which assets or stock are sold to a third party in a structured transaction. SGK has significant experience in both the estate and gift planning aspects of transferring closely held business as well as planning for sales of small businesses through asset and stock sales or related business transactions.

The most common probate avoidance planning in estates of significance is the use of trust planning. A-B trusts, charitable trusts and probate avoidance trusts in non-taxable estates are all varying versions of the trust concept. A trust is essentially a legal entity created for the benefit of certain beneficiaries under the laws of the state and the terms of the trust instrument itself. A trustee has a fiduciary responsibility to manage the trust assets and income for the benefit of the beneficiaries thereof. A trust can be created for any purpose which is not illegal and which is not against public policy. Significant estate tax savings and avoidance of probate are the primary reasons for contemplating a trust. At SGK, our estate planning attorneys make use of trusts in many areas and we look forward to explaining their potential value to you.

Gift Planning