Permanent Value

Week in Review 1/20/14

Bruce Doole
January 20th, 2014

The Estate Tax and Lifetime Gifting

As a general rule, it’s better to give away money during your lifetime than to leave it to your heirs after you pass away. There are numerous ways to give money to your loved ones gift-tax free while you’re alive—and even if your gift is taxable, at least the recipient can enjoy the gift’s full value while you pay the taxes on it. In contrast, if your estate is subject to the estate tax, those taxes will come directly out of what your loved ones would otherwise inherit.

Picture four quarters on the table in front of you. If you die with all four quarters and you’re in a 50% estate tax bracket (the current top rate is 40%, so 50% is not unimaginable), your heirs are left with two quarters and the federal government gets the other two.1 That’s the estate tax in action.

Now imagine a different scenario. You start with four quarters and move two quarters aside, representing a lifetime gift to your loved ones. Take one quarter and move it to the other side of the table as the gift tax you would owe.1 Your beneficiaries have as much as they did in the first scenario, and you’ve still got a quarter left!

Gifting provides a couple of added bonuses. For one, any future appreciation on the gift is in the hands of the beneficiary and outside your estate. Plus, you get to participate in the enjoyment of the gift while you’re still around.

Good options for minimizing taxes include giving away up to $14,000 per recipient per year gift-tax free, and making payments directly to medical and educational providers on behalf of loved ones.

However, if you have a large estate, your strategy might also include making taxable lifetime gifts utilizing the lifetime exemption—or more if your net worth is very high.

A couple of caveats:
Lifetime gifting can be a great strategy, as long as you leave yourself enough to live on. For the gift to count, it has to be irrevocable, ‘so be sure to plan carefully with the help of a professional.
If the estate tax is ever repealed, as it was for the 2010 tax year, you may regret having paid gift tax now in an effort to minimize your estate tax. You have to do the best you can, based on what you know now, within the context of your goals.

This Week’s Economic Data 

  • Retail sales rose 0.2% in December, following a 0.4% gain in November.
  • Producer price index was up 0.4% for December and 1.2% from December 2012.
  • Consumer price index inflation rose 0.3% after a flat reading in November.
  • Jobless claims were down 2,000 to 326,000 for the week of Jan. 11.
  • Housing starts decreased 9.8% in December after a 23.1% surge in November.
  • Industrial production increased 0.3% in December after a 1.0% gain in November.
  • Consumer sentiment is down 2.1 points to 80.4 for the mid-January reading.



Source: Charles Schwab/ Ivy Funds