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We Are Not At The End of the Road. As of now, the estate tax has not gone away and the gift tax has not gone
away. In fact, as the lifetime exemptions from the estate tax increase from $1.5 million per person in 2005 to
$2.0 million per person on January 1, 2006, the gift tax exemption remains constant at $1.0 million per
person. However, there are exclusions from the definition of "taxable gifts". These are important planning
opportunities to enhance families’ lives and assist in the transfer of wealth to younger generations.
Annual Exclusions. The most commonly recommended method of using the exclusions from taxable gifts are
annual exclusion gifts, which are now $11,000 per person per year. This means that a married couple can
give a child or grandchild $22,000 per year (if the couple elects to split their gifts or if both are owners of the
gifted property or cash). If the child or grandchild has a spouse, that number can be doubled again.
Assets which can be discounted make attractive candidates for annual exclusion gifts. These would include
fractional interests in real estate or so-called splinter gifts of interests in a family limited partnership or LLC.
Transferring real estate and marketable securities to an LLC is a particularly popular device right now to take
advantage of discounts for both gift tax and estate tax purposes. This is a subject for separate newsletters
and has been addressed before. Great care needs to be taken in the drafting of the organizational documents
of these entities to make sure that the value of the LLC interest transferred will withstand IRS challenges to
the annual exclusion classification. (If the gift does not qualify for the annual exclusion, it is counted against
the lifetime gift tax exemption and may result in gift tax or increased estate taxes.
Even aggressive planners do not recommend taxable gifts in today’s environment where there is an
escalating lifetime estate tax exemption and the possibility of a complete repeal of the estate tax. The latter
does appear to be unlikely. You may recall that when the estate tax repeal/adjustment laws were passed in
2001, the country had been enjoying surpluses. The war, recession and tax reductions have transferred those
surpluses to the largest deficit in history. These facts may well influence the congressional attitudes toward
repeal or amendment.
The bottom line to this discussion is that gift taxes are not going away and that the senior generations still
want to transfer wealth and improve the lives of their children and grandchildren. There are a couple of other
gift tax exclusions that should be considered - payment of tuition and medical expenses, in particular.
Medical Expenses. Section 2503(e) provides that paying medical expenses for a family member will not be
considered taxable gifts and can be made in addition to the annual exclusion gifting. The definition of medical
expenses is extremely broad. Besides the usual expenses for doctors and hospitals, the regulations permit
payment of the expenses of transportation "primarily for and essential to medical care". Furthermore,
amounts paid for medical insurance on behalf of a family member will be excluded from the taxable gift
category. With the rapidly increasing expenses of medical insurance, this is an opportunity that should not be
missed in the appropriate family situation.
An important point to remember is that payments for medical expenses must be made directly to the person
who provides the services not to the patient personally. You financial advisers can certainly do a service to
your clients by pointing these differences or making sure that your clients consult with their tax advisers on
these matters.
Tuition. Parents or grandparents can pay the tuition expenses for children or grandchildren over and above
the annual exclusion gifts of $11,000 per person. The important points to know about this exclusion are that
the tuition does not have to be for college. It can be for any school level from preschool or kindergarten on up.
As families and individuals become more interested in private or parochial education and place their children
in these schools, tuitions are rising. Most parents can certainly use financial assistance in meeting these
expenses. An important thing to recognize about this exclusion is that in order to qualify, payments must be
made directly to the educational organization . Also, the regulations make it clear that related expenses for
books, supplies, dormitory fees, housing and meals, are not included in the exclusion amounts. (A different
rule applies to Section 529 plans, which of course are limited to college and post-graduate expenses.) Thus,
a grandparent, for example, would have to be careful in allocating expenses for a grandchild between
payments which qualify for the tuition expense exclusions, payments which would be part of the annual
exclusion gifts, and any excess payments which might be part of the lifetime gift tax exemption.
Practical and tax advice on wealth transfer and preservation is part of the job of all professional advisers. If
you have clients who would benefit from an update or revision of their estate planning documents by
experienced professionals, please contact Jim Modrall or David R. Appleford, JD, LLM (taxation) at 231-941-
9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
away. In fact, as the lifetime exemptions from the estate tax increase from $1.5 million per person in 2005 to
$2.0 million per person on January 1, 2006, the gift tax exemption remains constant at $1.0 million per
person. However, there are exclusions from the definition of "taxable gifts". These are important planning
opportunities to enhance families’ lives and assist in the transfer of wealth to younger generations.
Annual Exclusions. The most commonly recommended method of using the exclusions from taxable gifts are
annual exclusion gifts, which are now $11,000 per person per year. This means that a married couple can
give a child or grandchild $22,000 per year (if the couple elects to split their gifts or if both are owners of the
gifted property or cash). If the child or grandchild has a spouse, that number can be doubled again.
Assets which can be discounted make attractive candidates for annual exclusion gifts. These would include
fractional interests in real estate or so-called splinter gifts of interests in a family limited partnership or LLC.
Transferring real estate and marketable securities to an LLC is a particularly popular device right now to take
advantage of discounts for both gift tax and estate tax purposes. This is a subject for separate newsletters
and has been addressed before. Great care needs to be taken in the drafting of the organizational documents
of these entities to make sure that the value of the LLC interest transferred will withstand IRS challenges to
the annual exclusion classification. (If the gift does not qualify for the annual exclusion, it is counted against
the lifetime gift tax exemption and may result in gift tax or increased estate taxes.
Even aggressive planners do not recommend taxable gifts in today’s environment where there is an
escalating lifetime estate tax exemption and the possibility of a complete repeal of the estate tax. The latter
does appear to be unlikely. You may recall that when the estate tax repeal/adjustment laws were passed in
2001, the country had been enjoying surpluses. The war, recession and tax reductions have transferred those
surpluses to the largest deficit in history. These facts may well influence the congressional attitudes toward
repeal or amendment.
The bottom line to this discussion is that gift taxes are not going away and that the senior generations still
want to transfer wealth and improve the lives of their children and grandchildren. There are a couple of other
gift tax exclusions that should be considered - payment of tuition and medical expenses, in particular.
Medical Expenses. Section 2503(e) provides that paying medical expenses for a family member will not be
considered taxable gifts and can be made in addition to the annual exclusion gifting. The definition of medical
expenses is extremely broad. Besides the usual expenses for doctors and hospitals, the regulations permit
payment of the expenses of transportation "primarily for and essential to medical care". Furthermore,
amounts paid for medical insurance on behalf of a family member will be excluded from the taxable gift
category. With the rapidly increasing expenses of medical insurance, this is an opportunity that should not be
missed in the appropriate family situation.
An important point to remember is that payments for medical expenses must be made directly to the person
who provides the services not to the patient personally. You financial advisers can certainly do a service to
your clients by pointing these differences or making sure that your clients consult with their tax advisers on
these matters.
Tuition. Parents or grandparents can pay the tuition expenses for children or grandchildren over and above
the annual exclusion gifts of $11,000 per person. The important points to know about this exclusion are that
the tuition does not have to be for college. It can be for any school level from preschool or kindergarten on up.
As families and individuals become more interested in private or parochial education and place their children
in these schools, tuitions are rising. Most parents can certainly use financial assistance in meeting these
expenses. An important thing to recognize about this exclusion is that in order to qualify, payments must be
made directly to the educational organization . Also, the regulations make it clear that related expenses for
books, supplies, dormitory fees, housing and meals, are not included in the exclusion amounts. (A different
rule applies to Section 529 plans, which of course are limited to college and post-graduate expenses.) Thus,
a grandparent, for example, would have to be careful in allocating expenses for a grandchild between
payments which qualify for the tuition expense exclusions, payments which would be part of the annual
exclusion gifts, and any excess payments which might be part of the lifetime gift tax exemption.
Practical and tax advice on wealth transfer and preservation is part of the job of all professional advisers. If
you have clients who would benefit from an update or revision of their estate planning documents by
experienced professionals, please contact Jim Modrall or David R. Appleford, JD, LLM (taxation) at 231-941-
9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| July 2005 SPECIAL GIFT TAX EXCLUSIONS - TUITION AND MEDICAL EXPENSES by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |