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John Harman, CPA PLLC

Gifting And Transfers

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Lifetime Giving Versus Transfers at Death Versus Life Insurance Trusts

Do you gift assets now, wait and distribute your estate at death, or use life insurance to make sure your legacy lasts for generations?

Now that the government has made the $5 million lifetime exemption permanent as it applies to estate, gift and GST taxes, it leaves the question as to those who have large estates whether to make lifetime gifts, distributing wealth at death, or using life insurance irrevocable trusts.

One good reason to use lifetime gifting is the ability to make gifts that are appreciating in value because tax law freezes the value transferred at the date of the gift ensuring future appreciation will not be taxed. If the same $5.25 million asset is transferred at death, all of the appreciation could be subject to estate tax.

The negative side of gifting sums of money to children, is that they may not be capable of handling the responsibility of handling money wisely, making it grow, or last. Also some children, having sudden wealth, feel no compunction to furthering their career or striving for financial independence. You will also want to visit with your CPA about any gifting program as the IRS regulations seem to be in a constant flux.  

If gifting is not an option and you have decided to enjoy the fruits of your labor until you pass, then it makes total sense to establish some form of a Living Trust. Contrary to popular belief, it doesn’t matter whether you have a $500,000 estate or a $1,000,000 estate, there many benefits to establishing a living trust over a simple will. One type of trust that may be helpful is the “Spousal Lifetime Access Trust (SLAT).  

This type of trust provides the surviving spouse access to the trust assets while still leaving the remainder trust to the beneficiary-children. This benefits the grantors as they can create the trust now, but modify the terms as to how and when their children gain access to funds later. Knowing the child’s financial ability is key but equally important is their moral character, their lifestyle, and work ethic. Plus you would never want to provide a large inheritance to a child if their marriage was on shaky ground. Which brings us to the last part of this equation, and that is estate planning using life insurance.

Once you’ve created your estate plan, the most cost effective way to fund your trust is with life insurance. A properly established life insurance trust can fund the needs of children, grandchildren, and even great-grandchildren. Don’t forget the tax benefits enjoyed by life insurance. With the proceeds being directed through a trust, you avoid all taxation and you also avoid the 3.8% investment income tax imposed under the new health care act.

Gifting can be beneficial especially if you’re in a position to do so, but the benefits of life insurance will stretch your dollar farther than any gift you can give. Don’t wait until you’re too old or unhealthy, as the cost of insurance will never get cheaper and the value it will bring to those you love ensuring a lasting legacy.

For more information on estate planning, gifting, life insurance trusts, and tax planning please contact us through the information found on this page.