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Putnam Gifting Opportunities in 2012

Putnam Gifting Opportunities in 2012

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Published by: Putnam Investments on May 22, 2012
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05/23/2012

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Giting opportunities in 2012
Investor Education
Withmajorchangestoestateandgittaxrulesonthehorizonin21auentinvestorsshouldconsidertakingactionnowtoplanananciallegacyLawsaectingestatesandgitsareamongmanyederaltaxprovisionssettoexpireattheendothisyearWithoutcongressionalaction21mayusherinavarietyonewtaxratesandexemptionlevelsAsaresultrightnowmaybethebesttimeorindividualstotakeadvantageogitingstrategieswiththepotentialtomaximizetheirlegacyAneectiveplanortranserringwealthamongamilymembersandheirstypicallyinvolvessomeormogitingManythinkogitingassomethingthatisonlytriggeredbydeathButtherearealsostrategiesthatallowindividualstopassalongwealthduringtheirlietimethroughgiting
What is giting?
TheInternalRevenueService(IRS)denesagitasthetranseroproperty—anytypeoasset—whilereceivingnothingorsomethinglessthanullvalueinreturnGitingmaybeusedormanyreasonssuchasprovidingnancialassistancetoamilymembersorothersreducingthevalueoanestatebeoredeathorshitingincomeromonetaxpayertoanother
Understanding the ederal git tax
TheIRSimposesataxongitsandlimitstheamountoassetsthatcanbetranserredbetweenindividualswithoutbeingsubjecttothetaxThemaximumannualexclusionamountiscurrently$1perdonorperyearor$26percoupleIthegitexceedstheannualexemptiontheamountisappliedtothedonor’slietimegitlimitUltimatelytheamountappliedtothelietimelimitwillaectthecalculationothedonor’sestatetaxCertaintransersarenotconsideredgits:
     •
Directtuitionormedicalpayments
     •
Transersbetweenspouses
     •
AnnualtransersthatdonotexceedthemaximumallowedForthosewishingtomakegitstowardhighereducationandcontributetoa29savingsplanthereareadditionaltaxadvantagesAdonormaymakeveyears’worthogitsatamaximumo$1peryearoratotalo$6Aslongasthetransersperrecipientdonotexceedthe$1annualexclusionamount(or$26orspousalgits)thetotalamountisnotaectedbytaxes
Rules about lietime gits
IndividualsareallowedtomakelietimegitsuptoaspecicexemptionamountwithoutbeingsubjecttogittaxesThecurrentexemptionamountis$12LietimegitsarereerredtoastaxablegitseventhoughnotaxesaredueunlessthelietimeexemptionamountisexceededThedonorisrequiredtoleaederalgittaxreturn(IRSForm79)Ithelietimegitexceedstheexclusionamountagraduatedtaxrateisappliedbegin-ningat18andeventuallyreachingamaximumoTheseratesareineector212WhensomeonedieslietimegitsareconsideredwhendeterminingwhetherederalestatetaxappliestoanestateTheamountyougitduringyourlietimecanreducehowmuchyoucanleavetoheirsatdeathwithoutbeingsubjecttoestatetaxForexampleianindividualmadelietimegitso$2millioninexcessotheannualexclusionamounto$1hisorherestatetaxexemp-tionamountwouldbereducedbythatsameamount
 
KEYGIFTINGFIGURESFORANDBEYOND
2012: 
lietime exemption amount
$5,120,000
(
maximum tax rate is 35%)
2013 and beyond:* 
lietime exemption amount
$1,000,000
(
maximum tax rate is 55%)*AssumesexpirationoBush-erataxcutsater212andnosubsequentlegislation
Giting strategies may skip a generation
Individualsmaygitassetstoyoungergenerationssuchasgrandchildrenthroughaprocessknownasgeneration-skippingtransersTheIRSimposesaseparatetaxongitsthatskipagenerationandaregitedtograndchildrenorbylawsomeonewhoisatleast7yearsyoungerthanthedonorThemostrecentversionothistaxwasenactedin1986topreventwealthyamiliesromtryingtoavoidederalestatetaxeswhenleavingassetstothenextgenera-tionByskippingagenerationtheseassetswouldnotbesubjecttothepotentialestatetaxburdenthatwouldordinarilyapplytothechildrenFor212theederalGenerationSkippingTranser(GST)taxexemptionamountis$12millionThatlevelisscheduledtodecreasetoapproximately$1millionin21Thenewexemptionamountwillbesetwithaninfa-tionadjustmentwhichhasyettobeannouncedThemaximumGSTtaxrateor212isandisscheduledtorisetoin21The212exemptionamountisatahistoricalhighpresentinganopportunityorindividualstoconsiderstrat-egiesthatbenetyoungerheirssuchasgrandchildrenOnesuchstrategyistheestablishmentoadynastyorgeneration-skippingtrusttotranserwealthtouturegenerationsAssetsheldinthesetrustsarenotsubjecttoutureestatetaxesaslongastheyremaininthetrustThesetrustscanbeundedwithacombinationolietimetranserswhichmayallowthedonortousethe$12millionlietimeexemptionamountor212Forthoseconsideringthisstrategyitisparticularlyimpor-tanttoworkwithanattorneywhoisknowledgeableaboutspecicstatelawsSomestatesimposecertainrestrictionsonthesetrustsalsoknownasaruleagainstperpetuitieswhichgenerallylimithowlongthetrustcanexist
Current low asset valuations alsoprompt action
TheactthatmanyassetvaluessuchasrealestateorownershipsharesinabusinessmaybelowrightnowprovidesanopportunitytotranserwealthtootheramilymembersbeorevaluesappreciateItmaybeanopportunetimeordonorstogitlow-cost-basisassetsthathavethepotentialorappreciation
BENEFITOFGIFTINGASSETSTHATARELIKELYTOAPPRECIATEOVERTIME.
$1,000,000
gift
$4,660,000
(value of giftafter 20 years)*
$3,660,000 in appreciationof gift is out of the estate,resulting in a tax savings ofmore than $1,200,000! †
    1
Assumes8annualgrowthrate
    2
Basedonamaximumestatetaxrateo
Forexampleconsideracurrent$1milliongitthathasan8annualgrowthinthevalueotheassetover2yearsTheassetwouldincreaseto$466millionanappreciationomorethan$millionontheoriginalgitAssumingataxableestateliabletoamaximumrateotheestatetaxsavingsromremovingutureappreciationomorethan$millionromtheestatebypreviousgitingwouldbemorethan$12millionGiventhecurrentexemptionlevelandtaxratesdonorsmayalsobenetromcertainadvancedplanningstrate-giesTheseincludevaluationdiscountsusingFamilyLimitedPartnershipsorcertaintruststrategiessuchasdynastytrustsorgrantortrustsOcoursewhilethesestrategiesremainavailabletodaythereisariskthatlegis-lativeactionmayeliminateorrestrictthemintheuture
Risks o a uture lower git tax exemption
Thecurrentexemptionamounto$12millionisthehighestonrecordandisslatedtodecreaseto$1millionin21PlanningaroundthecurrentlevelisnotwithoutriskItispossiblea“clawback”provisionmightapplyintheutureIsotheremaybeanadjustmentmadeatdeathitheprevailinggittaxexemptionamountwasloweratdeathcomparedwiththevaluewhenthegitwascompleted
 
Forexampleconsideragito$millionexecutedwhenthegittaxexemptionis$millionIthegitandestatetaxexemptionwasonly$1millionatdeaththedier-enceinthetwoamountswouldbe“clawedback”intothedecedent’sestateWhilethistypeo“clawback”provisionisariskitdoesnotmeanthatitwilllikelybeimplementedintheuture
Another planning opportunity or 2012:making charitable gits
CharitablyinclinedinvestorsshouldnotassumethelevelotaxbenetsaordedtocharitablegitstodaywillexistintheutureForexamplein212therearenoincomephaseoutsonitemizedtaxdeductionsortaxpayersinhigherbracketsThisgenerallymeansthattaxpayerswillreceivetheullbenetoitemizeddeductions—suchascharitablegitsandmortgageinterest—regardlessotheirincome*Incomephaseoutsonthesetypesodeductionsarescheduledtoreturnin21AdditionallytherehavebeenrecentlegislativeproposalsthatwouldurtherlimitthetaxbenetsomakingcharitablegitsOneexampleistoreducethetaxbenetsorthoseinthehighestbrackets(currentlytaxpayersintheandbrackets)meaningacharitablecontributiondeductionwouldbelimitedtonotmorethan28otheamountothecontributionorthosetaxpayersInanenviron-mentwheretheederalbudgetdecitisbeingheavilyscrutinizedreducingthesetypesotaxbenetsisbeingseriouslyconsideredAsaresultinvestorsmaywishtoacceleratecharitablegitsinto212aterconsultingwiththeirtaxandlegaladvisors
    1
Certainrestrictionsmayapplyitaxpayerissubjecttothealternativeminimumtax(AMT)
Choosing to git during lietime
Assetsmaybetranserredduringanindividual’slietimeaswellasupondeathTheollowingtableoutlinesseveralconsiderationsormakinggitswhileliving
CASEFORGIFTINGWHILELIVINGCASEAGAINSTGIFTINGWHILELIVING
Help heirs
while you are still living.

Reduce estate assets now
to avoid or minimize estatetaxes in the uture.
 
»
The git plus its uture appreciation is removed romthe estate o the donor.

Minimize income taxes now.
The giting o income-producing assets can shit the tax burden to amilymembers in lower tax brackets.
Ability to
use certain valuation discounts
in transerringamily-owned businesses and arms.
»
For example, gits o closely held businesses may beeligible or signicant discounts in value, up to 30%in some cases, due to the act that these owner-ship shares are not readily transerable in the openmarket. This is considered a “lack o marketability”discount. Also, these gits may have limited rightsattached, which would trigger a “lack o control”discount.
Certain states tax estates but not gifts.
Lietime gitsmay help minimize certain state-imposed estate taxes.
Asset protection.
Giting can shit assets to amilymembers with less creditor risk.
Donors lack control
over the assets ater the git has been completed, although trusts can help donorsmaintain some level o control over gited assets.
Loss of assets.
There is the possibility that there will be a uture need or assets previously gited to meetsignicant costs such as medical expenses, survivingspouse income needs, or helping settle uture estate-related costs.
Loss of step-up in cost basis
on appreciated assets at death. With giting, the recipient typically assumesthe original cost basis while heirs receiving assets at death generally assume date-o-death cost basis oninherited assets.

Potential for asset value(s) to decline
ater a git has been made.
Potential that
federal estate tax may be repealed
in the uture.
 
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This scenario may be unlikely due to the need or additional revenue to combat rising ederal budget decits.

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