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Nitesh Patel
Finance | Financial advice

It's A Given: 'Gifting' Can Provide An Effective Estate Planning Tool
By Nitesh Patel

The old adage "it's better to give than to receive" holds truth for estate planning.

"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 could otherwise be deducted from the estate's total value. With more of the estate available, a greater portion of the assets 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 exclusion ceiling varies year to year, the amount of an estate excluded from federal taxes by the Estate Tax Exemption is $1 milllion in 2003. Anything above that amount is taxed at a sliding scale, ranging from 31 to 49 percent of the total.

While $1 million may seem like a large amount of money, it is important to know that every asset owned -- including property, securities, art, jewelry, collectibles and the face value of insurance policies, is included in calculating the estate. Individuals who never considered themselves wealthy while alive could leave an estate subject to estate taxes. When proper steps are taken, as much of their estate as possible can be preserved.

Giving money away provides one of the simplest ways to minimize expenses. Under current annual gift tax exclusion laws, up to $11,000 per year per spouse can be given to each child or grandchild with no taxes due. Using that strategy, a married couple with two children and four grandchildren could give away $132,000 tax-free each year.

Gifts other than cash also can be included (as long as the receipient has immediate access to the property). Shares of stock, for example, can be given, and assets of this type - which might have a low current value but a high appreciation potential - may offer a way to give younger family members the start of a nest egg.

For some people, however, giving assets away outright is not feasible or practical. If money might be needed in the future, for example, an individual should think twice before gifting. A gift is just that. Once gone, it cannot be retrieved.

A common system for gifting is called a trust, a legal arrangement under which one person or institution (the trustee) controls property given by another person (the grantor) for the benefit of another (the beneficiary). There are two main types of trusts: testamentary, which take effect upon death, and living trusts, established while the individual is alive.

Trusts also are either revocable, meaning that they can be changed during the individual's lifetime, or irrevocable, or not changed.

In all trusts, the individual transfers property to the trust. Time and legal fees are reduced for survivors because the assets do not go through the probate process. Some trusts also control 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:

  • A Credit Shelter or Bypass Trust: Each spouse creates a trust, leaving up to $1 million to the trust. When the first spouse dies, the survivor has use of the income from that trust until he or she dies. After the survivor dies, the trust property might stay in the trust for the benefit of the heirs or be distributed outright to them.

  • Irrevocable Life Insurance Trust: If designed correctly, property inside a life insurance trust is not part of the gross estate. After the individual's death, the trust can use the cash from the death benefit to buy assets from the client's gross estate and provide cash to the estate to meet its estate tax liability as well as management and administrative expenses.

  • Charitable Remainder Trust: The individual's entire interest in a piece of property is given to the charity, but the donor or family members receive income from the trust for a specified period of time, after which the remainder interest passes to the charity.

    A solid team of law and financial service professionals can help sort through all the options and develop a plan to best suit your individual situation. In laying the groundwork today, you can help preserve as much of your estate as possible, ensuring that the assets you worked hard to achieve will continue to benefit the people and institutions you love long after you are gone.

    Nitesh Patel is a financial representative with the Northwestern Mutual Financial Network based in Clearwater for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin). To reach Patel, call (727) 799-3007 or e-mail [email protected].

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