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An Early, Untaxed Bequest

By Albert B. Crenshaw
Sunday, December 19, 2004; Page F01

This is the season for giving, and merchants and children alike encourage it.

But so do the nation's tax laws, and as parents and grandparents look toward the end of the year, accountants and other advisers suggest they think outside the gift-wrapped box.

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In general, taxes on what tax folks call "intergenerational transfers," and what the rest of us call gifts and bequests to the younger generation, can be quite harsh, despite Republicans' efforts to cut or repeal them. For families in the upper levels of wealth, the tax bite, federal plus state, can be around half of a large estate. And similar rates can apply to gifts, with the taxes levied on the giver, rather than the recipient.

Casual giving within families typically doesn't come to the attention of the Internal Revenue Service, but when gifts get larger, and especially when they leave paper trails (transfers of real estate, stock or business interests), it's a good idea to know the rules and stay within them.

"It's our experience that many people are unaware there is any limit" on giving, said Glenn G. Kautt of the Monitor Group, money managers and advisers in McLean. "I don't think you have to remind people [to make gifts] -- you may have to warn them that they may be running afoul of the gift-tax law."

Fortunately, within that law there are special provisions that help families pass along substantial amounts to children and/or grandchildren without having to hand off a piece to the government.

Doing so can be a nice benefit for a younger relative and also potentially remove some money from the older person's taxable estate. Thus, members of older generations who have cash or other assets to spare should consider making gifts or even setting up a long-term gift-giving program, experts say.

A key element of such a program is a provision in the law that allows anyone to give anyone else a certain amount of money tax-free every year.

The limit this year is $11,000, and married couples can be treated as two people, even if one spouse actually does all the giving. (However, if couples take advantage of this "gift-splitting" provision they are both supposed to file gift-tax returns, and the non-giving spouse must consent in writing to the split.) This means that a couple can give each child, grandchild, nephew, niece (or anyone else -- the recipient doesn't have to be a relative) as much as $22,000 every year. The gift doesn't have to be cash, but if you give an asset, for instance $22,000 worth of stock, your "basis" -- usually the purchase price -- carries over to the recipient, so that your donee will have to pay tax on everything above that amount when he or she sells the stock.

Also, to qualify for the annual gift-tax exclusion, as the $11,000 limit is called, a gift must be a "present interest." That means it has to be something that is of value right now, like cash or stocks, as opposed to the right to receive something of value at a later date, which is known as a "future interest."


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