By: John P. Napolitano, CFP®, CPA, PFS, MST

As summer settles in and families spend time together, many think about making gifts to charities or loved ones as a part of shedding assets in their estate or simply sharing the wealth.

This could be for estate tax planning, the fear of loss through a long term illness or simply for philanthropic purposes.  Here we are going to discuss a few ways that high net worth taxpayers can utilize their wealth for the next generation now rather than after they pass.

Gifts to family members or friends are never deductible for income tax purpose, but these gifts may be excluded from your future estate tax return. Under current law, each taxpayer has an exemption whereby any taxpayer may gift up to $15,000 to any recipient.  That means a husband and wife can each give $15,000, making a total possible gift of $30,000. To do this properly, there should be two separate checks from each spouse if they’ve got separate accounts. One check will suffice if it is a joint account. 

There is also a lifetime federal exemption of $5.25 million in 2013.  This amount rises to $5.340 million for 2014.  Essentially, this means that you can give away or die with up to $11,180,000 million, and pay no gift or death taxes to the IRS in 2018.  There may, however, be state death taxes to pay. In my home state of MA, the current exemption still sits at $1 million.  

When a gift is given that exceed the annual exclusion amount of $15K, a gift tax return must be filed or technically you owe gift taxes on that gift. This is frequently overlooked with gifts of real estate or college 529 plans.  For the 529 plans, there is yet another tax exemption that allows you to contribute up to 5 years of 529 gifts currently, and spread them over a 5 year period. This also requires an annual gift tax return. Make sure that you inform your tax preparer about any 529 contributions that exceed $15,000 in any one year.

Gifts of real estate have a few problems.  The first may be the tax cost.  If mom gives you her house because she is concerned about losing it to long term health care costs, you’ve just inherited her tax cost. Your cost basis for calculating future gains from a sale will be whatever her cost basis is.  In today’s world of appreciating real estate, this could be a big tax hit.

Gifting a partial interest in real estate may also make sense. With a partial gift, the tax code may permit valuation discounts thereby helping to create some leverage for the donor.

Making Cents is published in Gatehouse News Media publications such as Patriot Ledger

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice.