There are many complicated rules regarding charitable donation, transfers, and gifts. Here are a few terms that will help you determine what is the best way to save your assets when giving a gift.
Gift Splitting
Gift splitting is a taxation rule that allows a married couple to split a gift’s total value as if spouse contributed half of the amount. Gift splitting allows a couple to increase their total gift tax exemption amount by combining individual allowances. The total cash value changes every few years; the annual exclusion for gifts is $11,000 (2004 - 2005), $12,000 (2006 - 2008), $13,000 (effective January 1, 2009 per IR 2008 -117). (http://www.irs.gov/businesses/small/article/0,,id=164878,00.html)
Gift Splitting Explanation
For gift splitting to be official, both spouses must agree to the gift and specify the situation when filing taxes. In 2008, the gift tax exemption was set at $12,000 per individual gift annually. Gift splitting allows a couple to donate a total of $24,000 before being taxed on the contribution. You may want to meet with an accountant or tax advisor if you are unsure or if there are extenuating circumstances.
As an example, you may want to give your child $20,000 to purchase a car. If you make the gift as one parent, $8,000 will be subject to gift taxes; the difference between $20,000 and $12,000 exclusion. However, if you split the gift with your spouse, with each of you contributing $10,000, both contributions will fall under the $12,000 limit, making the entire gift non-taxable.
Gift Tax
A Gift Tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. It is the giver of the gift who is required to pay the gift tax. The receiver of the gift may pay the gift tax or a percentage of it, on the giver’s behalf in the event that the giver has exceeded his/her annual personal gift tax deduction limit.
Gift Tax Explanation
The following are generally excluded from gift tax:
1. Gifts to your spouse.
2. Gifts to a political organization for use by the political organization.
3. Gifts that are valued at less than the annual gift tax exclusion for a given year.
4. Medical and educational expenses, such as payments made by a donor to a person or organization such as a college or hospital.
As the regulations applied to gift taxes are very complicated, it is best to check with your tax advisor if you have given anyone a gift valued at more than $13,000 for 2009.
Gift of Equity
A Gift of Equity usually refers to the sale of a home, made to a family member or someone with whom the seller has had a previous relationship, at a price below the current market value. The difference between the actual sales price and the market value of the home is called the gift of equity. Most lenders allow the gift to count as a down payment on the home.
Gift of Equity Explanation
Say your parents are willing to sell you their $200,000 home for $150,000. Mortgage lenders will accept your parent’s gift of equity of $50,000 as the equivalent of a cash down payment, provided that they are satisfied that the house is really worth $200,000. They will usually require two appraisals rather than one because the sale price was set within the family rather than through arms-length bargaining.
Taxable gifts are those to one recipient in excess of $12,000 per year. If you are married and have at least one child, each parent could gift the three of you $12,000 a year, or $72,000 in all (6 gifts times $12,000), without it being taxable.
A gift of equity requires a gift of equity letter that is signed by both the seller and the buyer. A gift of equity will usually have tax consequences that could impact the asset’s value for the new homeowner and have capital gains implications for the seller. There may be other requirements by the mortgage lender such as a mortgage insurance waiver if the mortgage is less than 80% of the actual value of the house.
Family Limited Partnership - FLP
This is a type of partnership designed to centralize family business or investment accounts. FLPs pool together a family’s assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used to minimize estate tax impact since the shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership’s holdings.
FLP Explanation
An FLP is different from a conventional trust, as family members actually own a share in a business. Shares can be gifted to family members over years, thus taking advantage of gift tax exemptions on an annual basis. The assets held in an FLP impact the level of estate tax savings that can be realized by using an FLP. In general, the more illiquid and complex the asset mix, the more difficult the FLP is to evaluate, and the larger the potential for estate tax savings.
Under the typical arrangement, the FLP is set up so that Husband and Wife are each general partners. As such, they may own only a 1 or 2 percent interest in the partnership. The remaining interests are in the form of limited partnership interests. These interests will be held, directly or indirectly, by Husband, Wife, or other family members, depending upon a variety of factors which will be discussed.
FLPs can protect your assets from creditors, bankruptcy, and lawsuits. As a general rule, if you are using the FLP to achieve estate tax savings, make sure that:
1. A credible appraisal is obtained to support the amount of the discount which is claimed. 2. The documents are properly drafted. 3. There is a sound purpose for the plan other than tax avoidance, like asset protection or privacy.
This information presented cannot substitute for competent legal advice and is not an endorsement for a specific strategy or proposal.
