The Up-Side of Down Times

Most of the victims of the Great Depression of the 1930’s have been many years in retirement.  For the rest of us who are trying to manage our finances to stay afloat, these are times unlike anything we have known.  Out of the economic chaos though, there are some opportunities presented by a portfolio of securities whose value has shrunk dramatically, especially in the area of estate planning.

If you are concerned about the effect of the federal estate tax on your assets, you may wish to consider a more aggressive gift program.  An asset which has shrunk in value will obviously consume less of your lifetime exemption; you also have an annual gift exemption to each donee of $12,000 which doubles if you are married and file a joint return.  Therefore if you have three children and file a joint return you could give them a total of $72,000 and not use any of your lifetime exemption.  If you want to go beyond children to grandchildren or spouses of children, you might go well beyond that; add a $12,000 exemption for each.

Although a lifetime gift carries to the donee the basis of the donor (if you paid $10 for a stock, and the donee sells it for $50, there is a taxable capital gain of $40), it might be that the donee’s federal tax bracket is low enough to escape paying any tax on the sale, as the Internal Revenue Code exempts from capital gains tax taxpayers whose income tax rate is 15% or less.  And if there is a capital gain tax payable, the maximum federal rate is 15% of the gain.

Because of a quirk in the Internal Revenue Code, an advantage in not making gifts during your lifetime is that the donee of a gift at death receives a stepped-up basis.  (E.g., if the donor paid $10 for a stock selling at $50 at his death, the donee’s basis is $50, and if the stock is sold at that price there would be no federal capital gains tax.)

What this illustrates is the need to sharpen your pencil and to compare various means of making gifts of your assets, taking into consideration the cost of your assets, the amount its value has fallen in this recession, and the income tax rates which your potential donees are paying.  Of course, there is a fundamental question you must ask of yourself before doing any of these calculations: Given all circumstances how much can we afford to give away and not put our life-style in jeopardy.

We should be able to help you in making these determinations.

– Ken Butera

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