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‘Tis the Season to Think about Gifting / York, PA

GiftingWhen you mention "gifting" what usually comes to mind is a birthday or Christmas. What I’d like to talk about today is gifting assets to another generation. Your federal estate tax exemption, which is the amount you can give away tax free when you die, for this year is $5.34 million and next year will be $5.43 million and if you have more assets than that your estate will owe federal estate taxes. Married couples have an unlimited gifting privilege between spouses in life or death.

In certain states, the estate exemption is just $1 million, not the $5 million (indexed for inflation) as at the federal level. CBS Boston's recent posting, titled All About Gifting Assets, warns that things can get complicated pretty fast and you should have a good estate planning attorney to help you.

The annual gift exclusion for anyone is $14,000. That means you can transfer this amount this year (and then next) to as many recipients as you want, provided you have the money to make the gifts. If married and your spouse joins in, then you can gift a total of $28,000. What's more, you can pay medical or school bills for an individual and not incur a gift tax. In other words, such “gifts” are not counted toward that gift exemption amount.

Taking advantage of these opportunities is a great idea, so why not give away some money to help the next generation accomplish their goals (or to pare down your estate so you won’t owe estate taxes). For instance, if you have an estate worth $1.2 million, there will be no federal estate taxes but (depending on where you live) some state estate taxes. Would you rather give it away to your family or to the government?

If any of your grandchildren are in college or grad school you can pay their tuition and medical insurance, but you need to pay it directly to the school or insurance company. And after paying the bills (if you still have some money left), you can still hand over a check to them for $14,000, or with your spouse, you can make it $28,000.

Reference: CBS Boston (November 27, 2014) All About Gifting Assets

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Ok, Who Gets the Renoir? / York, PA

MP900390083 (1)Of all the fights that can erupt during divorce proceedings or when a family member leaves behind a large estate, some of the biggest take place over the artwork.

A recent Wall Street Journal article, titled "Tips for Dividing Art in a Divorce or Death," warns that fighting can be avoided if art lovers and their loved ones learn a little about some legal and tax basics. The original article offers some ideas on how to decide—in a fair and civilized manner—who gets what, and the ways of disbursing an art collection to minimize taxes.

First, after an art collector dies—before anyone starts eying their walls for a new masterpiece—the entire estate must be finalized in probate court, which can take some time (maybe even years). If the deceased's home is not occupied, the original article advises to upgrade the security to transfer the art to a climate-controlled fine-art storage facility. None of the art should be removed before the court-approved distribution, and the decisions about the art should be part of the overall estate planning, as art that passes at death is subject to a step-up in value for tax purposes. All artwork will need to be appraised professionally.

Even if an art collector specifies who gets what, there still may be problems. For instance, if a collector wills a painting to one person and gives everything else to another, the second individual will be responsible for paying the estate tax for the painting. The original article suggests that the will should specify that each heir will pay his or her share of taxes on the assets received.

For a person who dies in the current year (2014) there is a federal estate tax threshold of $5.34 million, so an estate worth less than that has no estate tax liability. However, the article reminds us that you only need one Picasso or Warhol to put you over that line and make your estate taxable. This tax could be as much as 40%! To make matters worse, some states also tax up to 20% above a $1 million threshold.

The original article also describes how collectors will sometimes sell art to help defray anticipated estate taxes. Alternatively, you should read the original article and talk to your estate planning attorney about setting up a tax-exempt charitable remainder unitrust and gift artwork into the same.

If there is a Degas in your dining room or maybe a Dali in your den, speak to an experienced estate planning attorney about a strategy to pass your collection to your family in the most prudent manner.

For more information about estate planning, please visit my estate planning website.

Reference: Wall Street Journal (Sept. 21, 2014) "Tips for Dividing Art in a Divorce or Death"

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