The old adage that "it's better to give than to receive" holds some
truth when thinking about estate preparation. "Gifting" - pulling money, personal property
and possessions out of an estate before or after the time of death - can
help reduce taxes and administrative expenses that might otherwise be
deducted from the estate's total value. With more of the estate
available, a greater portion of the assets that took a lifetime to build
is available to benefit family, friends and charities of choice.
A brief look at how estates are taxed helps illustrate the value of
gifting. While the number varies from year to year, the amount of an
estate excluded from federal taxes in 2007 is $2,000,000. Anything below that amount is not taxed.
Anything above that number is taxed on a sliding scale up to a maximum rate of 45%.
While $2,000,000 may seem like a large amount of money, it is important to
know that every asset from property, securities and art, to jewelry,
collectibles and the face value of insurance policies, is included in
calculating the total size of an estate. Individuals who never
considered themselves wealthy while alive could leave an estate subject
to rather high taxes. When proper steps are taken, however, as much of
this estate as possible can be preserved, in order to benefit the people
and charities of the individual's choice.
Giving money away while still alive provides one of the simplest ways to
minimize these expenses. Under current annual gift tax exclusion laws,
up to $12,000 per year per spouse can be given to each child or
grandchild with no taxes due. Using this strategy, a married couple
with two children and four grandchildren could give away $144,000
tax-free each year.
Gifts other than cash also can be included (as long as the giftee has
immediate access to the gift). Shares of stock, for example, can be
given, and assets of this type - which might have a low current value
but a possible high future appreciation - may offer a way to give
younger family members the seeds to a future nest egg.
For some people, however, giving assets away outright is simply not
feasible or practical. If funds might be needed in the future, for
example, an individual should think twice before gifting. A gift is
just that. Once gone, it cannot easily be retrieved.
In other instances, outright gifts do not minimize expenses enough. A
trust can sometimes help further reduce the estate's total value and to
provide more specific direction about its distribution.
In simple terms, a trust is a legal arrangement under which one person
or institution (the trustee) controls property given by another person
(the trustor) for the benefit of a third party (the beneficiary). There
are two main types of trusts: testamentary, which take effect upon
death; and living trusts, which are established while the individual is
still alive.
Trusts also are either revocable, meaning that they can be changed
during the individual's lifetime, or irrevocable, or not easily changed.
In all trusts, ownership transfers from the individual to the trust.
Technically speaking, the individual no longer owns the assets; the
trust does. Time and legal fees are reduced for survivors because the
assets do not go through the probate process. Some trusts also provide
control over when and how assets are distributed. A trust may name a
guardian for minor children, for example, and it might specify when and
how many assets the children could access.
Within these categories, trusts can be written to suit a wide range of
situations and needs. Some of the more popular types of trusts include: