Tax Considerations for Gifting PC1411-Print

TAX MANAGEMENT

TAX CONSIDERATIONS

A Guide to Understanding Your Options People often provide gifts to family members and charities during their lifetime. Beyond simply being generous there are various benefits to the donor including reducing current income and future estate taxes. There are certain gifting methods that allow an individual to pass assets to the next generation or charitable organizations in a tax-free manner. SOME KEY OPTIONS FOR REDUCING TAXES WHILE GIFTING TO A PERSON OR ORGANIZATION YOU CARE ABOUT, INCLUDE: Tax Considerations for Gifting During Your Lifetime

1. ANNUAL EXCLUSION GIFTING TO INDIVIDUALS These include annual tax-free transfers of no more than $15,000 (2018 limit) of cash, real estate, securities, business interest, and/or limited partnership interests made to any individual. Gifting these assets helps a family avoid the gift and estate tax on those assets in the donor’s estate. The gift grows outside of the donor’s estate from that point forward. 2. 529 PLAN CONTRIBUTIONS

GIFT

NO GIFT

Initial Amount

$15,000

$15,000

- Tax

$0

$5,600 (at 40%)

Final Amount

$15,000

$9,400

Contributions to a 529 College Savings Plan grow federal tax-free and will not be taxed when the money is withdrawn by the beneficiary if used for qualified education funding. Many states also offer tax breaks for 529 plan contributions in the form of income tax deductions to residents. Contributions to the plan do not have to be reported on federal tax returns, simplifying your tax reporting, and deposits up to $14,000 per beneficiary per year will qualify for the annual gift tax exclusion. Account owners can even combine five years worth of Annual Exclusion Gifts and could thus contribute $70,000 per donor (in 2018) for any beneficiary in year one, effectively removing those assets from the donor’s estate for estate tax purposes. 3. TUITION AND MEDICAL EXCLUSION GIFTS This type of gift is most relevant when the donor is not a parent of the beneficiary because generally the parents’ payment of these expenses is considered support of the child and not a gift. These gifts are made directly to an educational

GIFT

NO GIFT

Initial Amount for Tuition

$35,000

$35,000

+  Initial Amount for Insurance

$1,500

$1,500

=  Total

$36,500

$36,500

-   Estate Tax

$0

$14,600 (at 40%)

Beneficiary Amount

$36,500

$21,900

Wealth | Investments | Planning Commerce Trust Company

institution for tuition amounts or to a provider of medical care (including payments for medical insurance, but not for expenses that are reimbursed by insurance). These payments are not treated as additional gifts to the family, and will avoid estate tax in the donor’s estate. 4. GIFTING YOUR LIFETIME EXEMPTION NOW The combined gift and estate tax exemption is $5,450,000. You may transfer these amounts to another beneficiary without incurring estate or gift taxes. This doesn’t apply to your spouse because you may transfer unlimited amounts to your spouse. Gifts must be irrevocable but can be made of a future interest, not just a present interest, allowing you to provide access to the funds in a trust with certain conditions (e.g., the beneficiary reaches a certain age). The illustration below demonstrates the power of early gifting.*

GIFT

NO GIFT

Initial Amount

$1,000,000

$1,000,000

Account Value after 15 Years Growth

$2,000,000

$2,000,000

- Estate Tax

$0

$800,000 (at 40%)

Beneficiary Amount

$2,000,000

$1,200,000

*Assumes 15% capital gains rate continued, estate tax at 40%. 5. TAXABLE GIFTS

Taxable gifts include gifts in excess of your annual exclusion gifts and your lifetime exemption and can consist of almost any type of asset, including cash, real estate, securities, business interest, and limited partnership interests. Gifts must be irrevocable but can be made of a future interest, not just a present interest, allowing you to provide access to the funds with certain conditions (e.g., the beneficiary reaches a certain age). While every dollar of taxable gifts requires a gift tax return and gift tax paid, the effective cost of the gift tax is less expensive than the estate tax. This is because when a gift is made, only the amount gifted is taxed, and the tax that is paid is now out of the estate. There is not tax paid on the gift tax. Additionally, growth of the gifted asset avoids estate tax.

$1,000,000 gifted today doubles in 15 years

$1,000,000 today doubles in 15 years in estate to $2,000,000

$400,000 Estate Tax

Child’s investment less 15%* capital gains on tax on grown $1,850,000

TO GIFT EARLY?

OR NOT TO GIFT EARLY?

Child receives $1,600,000

Contact a Commerce Trust advisor for help exploring your options and identifying a gifting strategy that fits your situation and reduces your tax burden. 1-855-295-7821 | commercetrustcompany.com

Wealth | Investments | Planning Commerce Trust Company

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