Monday, August 22, 2011

Don’t Let Tax Laws Limit Your Generosity

The past two years have been tough on the average American family.  The economy has been floundering and the unemployment rate has been hovering around 9-10% since 2009, not to mention the roller coaster ride we’ve all been through with the stock market. But through it all some families and individuals have fared better than others—and many of these lucky ones are eager to extend a helping hand to their family and friends... if only the tax laws would let them. 

A recent article in Forbes, entitled 6 Ways to Give Family and Friends Financial Aid, explains that “the tax law regulates your [financial] generosity... This kind of assistance is considered a lifetime gift unless it’s for someone whom you are legally obligated to support, such as a child.” This is important because “lifetime gifts” over a specific amount (currently $5 million per person) are subject to taxation.

“Gifts of cash or other assets can count against your $5 million exclusion from gift or estate tax. If you exceed that limit, you could wind up owing gift tax of up to 35%. Even if you don’t, your lifetime gifts would reduce how much you can pass tax-free through your estate plan.”

But if you are willing to work within the system there are ways to give financial assistance to friends and family without having to pay gift tax. Here are a few strategies suggested in the Forbes article:

1. Don’t give more than $13,000 (or $26,000 if you are giving as a married couple) per person per year. $13,000 is the current annual gift exclusion amount, and giving more than this can count against the $5 million lifetime exclusion.

2. Pay medical, dental, or tuition expenses directly to the provider. “Without using your annual exclusion or dipping into the lifetime limit, you can pay for tuition, dental and medical expenses of anyone you want. Note that you must make the payments directly to the providers of those services.”

3. Contribute to 529 educational savings plans. While contributing to a 529 savings plan does still count as a financial gift, once in the account the money can grow and be withdrawn tax-free, “provided it is used to pay for college, a graduate, vocational or another accredited school, or for related expenses.”

These are only a few of the suggestions offered in the article, and a consultation with your attorney or financial planner could reveal even more options available to you should you wish to offer aid to friends or family without coming up against the lifetime gift or estate tax.  Please contact our office for more information.