There are two primary advantages to utilizing gift giving as a part of your inheritance planning strategy.
For one thing you get to enjoy the simple pleasure of doing something nice for a loved one while you are still alive.
This is good for you emotionally, but it is good for your heir as well because he or she doesn't have to juggle the grief/happiness conundrum that goes along with receiving an inheritance.
In addition to this human give and take you also reduce the value of your estate when you give gifts and this can provide you with estate tax efficiency.
You do have to address the reality of the gift tax, but there are exemptions and other creative ways to give tax-free gifts.
One instrument that can enable the tax-free transfer of assets is the GRAT or grantor retained annuity trust.
The way to take advantage of this type of trust is to fund it with assets like certain real property, securities, and perhaps business interests, which are likely to appreciate.
Like any trust you name a trustee and a beneficiary, and with the GRAT your beneficiary must be a family member.
When you are drawing up the trust agreement you set a term and you set the annuity payments that you will receive out of the trust during that term.
The taxable value of this gift into the trust will be calculated using estimated appreciation calculated as 120% of the federal midterm rate for the month during which the trust was created minus your annuity payments.
The tax strategy here is called the "zeroed out" GRAT, so the payments that you set when you create the trust will equal its total taxable value.
Since you are "zeroing it out" you will owe no gift tax.
But, if the assets in the trust appreciate beyond the taxable value of the trust as originally calculated by the IRS, your beneficiary will assume ownership of that appreciated remainder free of taxation.
For one thing you get to enjoy the simple pleasure of doing something nice for a loved one while you are still alive.
This is good for you emotionally, but it is good for your heir as well because he or she doesn't have to juggle the grief/happiness conundrum that goes along with receiving an inheritance.
In addition to this human give and take you also reduce the value of your estate when you give gifts and this can provide you with estate tax efficiency.
You do have to address the reality of the gift tax, but there are exemptions and other creative ways to give tax-free gifts.
One instrument that can enable the tax-free transfer of assets is the GRAT or grantor retained annuity trust.
The way to take advantage of this type of trust is to fund it with assets like certain real property, securities, and perhaps business interests, which are likely to appreciate.
Like any trust you name a trustee and a beneficiary, and with the GRAT your beneficiary must be a family member.
When you are drawing up the trust agreement you set a term and you set the annuity payments that you will receive out of the trust during that term.
The taxable value of this gift into the trust will be calculated using estimated appreciation calculated as 120% of the federal midterm rate for the month during which the trust was created minus your annuity payments.
The tax strategy here is called the "zeroed out" GRAT, so the payments that you set when you create the trust will equal its total taxable value.
Since you are "zeroing it out" you will owe no gift tax.
But, if the assets in the trust appreciate beyond the taxable value of the trust as originally calculated by the IRS, your beneficiary will assume ownership of that appreciated remainder free of taxation.