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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.
Lifetime Giving Through Annual Exclusions Insurance
The Concern Many affluent clients express a desire to provide for their loved ones after they are gone. One of the best ways to accomplish this is to establish a lifetime giving program. A lifetime giving program allows clients to provide for their families in a manner that is private and that controls when their heirs actually receive the gifted assets. While the federal estate tax is not a concern for your clients, they would still like to maximize the amount transferred to their family in a gift tax-efficient manner. Lifetime Giving The gift tax annual exclusion is the amount that any donor can give to any one beneficiary annually without having to pay a gift tax or use any portion of their lifetime gift tax exemption amount. If the gifts in any one year are limited to the gift tax annual exclusion, the donor does not have to pay a gift tax or file a gift tax return. In 2014, the annual exclusion amount is $14,000, although this amount is indexed for inflation, so it will gradually increase. For a gift to qualify for the annual exclusion, it must be a present interest gift, which means that the donee has the right to the gifted funds in the year of the gift. The simplest way to accomplish this is to make an outright gift of the annual exclusion amount to a beneficiary. Making an outright annual exclusion gift is a simple way for your clients to transfer some of their assets; however, it does not allow your clients to exercise any control over the asset once it has been given away. If your clients would like to still be able to take advantage of the simplicity offered by an annual exclusion gift while exercising control over the gifted assets, then they should consider making annual exclusion gifts to an irrevocable trust.1 An irrevocable trust that gives the beneficiary a temporary withdrawal right (known as a “Crummey Power”) will allow the gift to qualify for the annual exclusion while still giving the donor the ability to control the gifted asset through the provisions of the trust.2 If your clients would like to maximize the amount that is eventually transferred to their heirs, they should consider leveraging those annual exclusion gifts with life insurance. To leverage the annual exclusion gift with life insurance, the trustee of the irrevocable trust would use the gifted assets to purchase life insurance, which allows the trust to take advantage of the rate of return available through the life insurance death benefit as well as the tax advantages inherent in a life insurance contract. Life insurance that is owned by an irrevocable trust will generally be received income, estate and generation-skipping tax-free.3 How It Works Consider Henry and Sarah Jones, both aged 68. Henry and Sarah have assets of $10 million, three children and six grandchildren. They are not in the habit of making gifts to their children and grandchildren, but are interested in beginning a lifetime giving program. They were considering just making outright gifts to their children, but are worried about making direct gifts to their grandchildren, since their grandchildren are still quite young. Their financial planner has suggested that Henry and Sarah establish an irrevocable trust for the benefit of their grandchildren, funding it with annual exclusion gifts. You have recommended that they consider purchasing a survivorship life insurance contract inside the irrevocable trust as a means of further leveraging their annual exclusion gifts. To help Henry and Sarah with their decision, you show them the following three scenarios. The first shows their current estate, growing at an assumed after-tax rate of 2.5% without making any gifts to their grandchildren. The second scenario shows Henry and Sarah giving $84,000 (which is the $14,000 annual exclusion multiplied by six grandchildren) per year to the irrevocable trust, which the trustee invests at a gross rate of return of 6% (after-tax rate of 3.9% in a 35% tax bracket). The third scenario shows the same $84,000 annual gift to the trust, but rather than investing the gifted money in taxable investments, the trustee uses the $84,000 to purchase a life insurance policy. Take a Look   Life Chart1)Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping transfer tax). Failure to do so could result in adverse tax consequences. 2) Gifts to a trust may qualify for the annual exclusion if they are “present interest gifts” and the trust beneficiaries have “Crummey” rights of withdrawal over such gifts. Copyright © 2014 NFP. All rights reserved.
Thomas Joseph
Other articles by: Thomas Joseph
Categories: Fleming Financial Services, Fleming Financial, General Information, Tax Strategies, Estate Planning
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