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gifting

Investments

Why I Love Giving My Nieces and Nephew One Particular Gift

by Evan

With Christmas less than 24 hours away I thought I would take a moment to discuss my favorite gift giving experience…and I get to make it at least twice a year!  and I don’t even get that much credit for it.  In fact, in terms of “credit” I would be much smarter to buy The Wife a new bag from Louis Vuitton which she swears is an asset.  Nope, it is a gift for my nieces and nephew.  As of the date of this post I have 2 nieces and a nephew (expecting another nephew in a few months to even out the score), and I get excited each time to give them one particular gift whether it is their birthday or in this case Christmas.

It is the gift of money safely invested for them!

Instead of buying them material garbage made in China, every birthday and Christmas I transfer money to their investment account.  I then invest their money in a particularly safe (in my opinion) company and/or broad based ETF with low annual fees and no commission costs from Fidelity.

List of Investments for Family Members

Titling the Gift Account

I keep the accounts titled in my name, but have the statements sent to their parents, so they know exactly what’s happening in the account.  The reason I don’t do a joint account with the niece or nephew is that if in the off chance they are not a responsible adult I want the opportunity not to give them the money (or I can give it to their parent or what not).

Will it ever be a ton of money? Probably not, but I know that my 18 year old future nieces will be much happier with cash for their freshman year of college than the barbie doll that they played with for 35 seconds and forgot about.

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Personal Finance

How Do You Title Your Children’s Investments or Savings Accounts?

by Evan

Twice in the span of a week I was asked my thoughts on titling of children’s assets.  It wasn’t asking how they should invest their children’s investments, or more specifically, their clients’ children’s assets, but rather how should the accounts be actually titled.  I am of the opinion that money can do good things and money can do bad things, so the actual titling of the assets is a very important issue to consider.

It should be noted that even the term “children’s investments or savings” may have different meanings to different people.  In my particular case I am referring to money that I am gifting my son (i.e. I am not looking for it back), and gifts made to him by others wherein they felt it was alright for me to keep tabs on it for the next two decades (at least two decades – as discussed below).

What is a Uniform Transfer to Minor’s Account?

An UTMA account is one which a custodian operates a child’s savings or investments, or as investopedia puts it,

An act that allows a minor to receive gifts such as money, patents, royalties, real estate and fine art, without the aid of a guardian or trustee. Under UTMA, the gift giver or an appointed custodian manages the minor’s account until the latter is of age (usually 18 or 21). The Uniform Transfer to Minors Act also shields the minor from tax consequences on the gifts (up to a specified value).

It is a very simple and natural way to set up the account.  The common thought process is, “It is their money I’ll act as some type of fiduciary-custodian for it and when he or she hits 21 it is theirs.”  However, I don’t believe that is in the best interest of the child.

Why I Don’t Like UTMA Accounts

There is one minor reason and one very major reason why I dislike that type of set up (as well as the UTMA’s cousin the 2503(c) trust account).  The minor reason has to do with college planning.  Under current law assets in an UTMA are counted as a student’s assets for purposes of financial aid (as opposed to a parent’s assets).  When calculating eligibility for financial aid it is much more detrimental to have assets in a child’s name.  This is a huge deal for most.  So why is it a minor one reason? Only because the next reason I dislike UTMAs is so much more important.

In most states the UTMA becomes the property of the child at age 21 (there are a few States which have held onto the 18 age).  Do you think “21 year old you” should have received any amount of money? How long do you think you would have held on to it before it was gone?  Maybe it is because I am surrounded by children under the age of 5, but this seems like a much more pressing issue than financial aid planning.

How I have Titled My Son’s Assets?

My son’s savings account is titled jointly between The Wife and I (and appropriately and clearly labeled as such in our easy to use Capital 360 Account) while his investment account is titled in my name alone.  The investment accounts I set up for my nieces are set up in my name with one of their parents as beneficiary should I prematurely predecease (the parents also get a copy of the statements).  This type of arrangement only works if you really see yourself as a fiduciary in the strictest sense of the word.

My goal one day is to use the accounts as either teaching tools or to hand over clear and free one day, but that day will be when The Wife and I decide he is ready (or in the case of my nieces – when their parents decide).

The obvious negative regarding this type of set up is that I’ll be paying tax on those investments until control is fully relinquished.  Unfortunately,  the accounts aren’t large enough to worry about the unrealized gains just yet (and the way the kiddie tax laws are set up right now it isn’t going to matter all that much in the future).

How have you titled your Children’s Savings and Investments?

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Taxes

Tax Changes for 2013–Fiscal Cliff Deal Finalized

by Evan

CCH recently released a fantastic Tax Briefing on the legislation passed to avoid the tax die of the Fiscal Cliff.  There were some significant changes to the tax law, as well as avoidance of some terrible sunsets.  I think my personal opinion of the deal would be better suited for another post.  Below are some of the key highlights:

2013 Income Tax Changes via American Taxpayer Relief Act

Key Income Tax Provisions

  • Taxpayers with taxable income of $399,999 ($449,999 for married taxpayers filing jointly) will not have their income tax rate changed.
  • So if you were in the 10%, 15%, 25%, 28% 33% or 35% marginal tax rate nothing as changed as it relates to your income tax rate on ordinary income.
  • Taxpayers with taxable income of $400,000+ ($450,000 for married taxpayers filing jointly) will be taxed at 39.6% (these taxpayers will obviously still benefit from all those lower tax brackets until they hit that 400,000th dollar).
  • All brackets are going to be adjusted for inflation
  • Those provisions which try to minimize the marriage penalty are extended
  • Finally a permanent AMT (Alternative Minimum Tax) solution has been implemented
  • Sunset of temporary Social Security Tax reduction (The 6.2% FICA taxes paid by employees to 4.2% which was initiated a couple years back)

Key Capital Gains and Dividend Tax Provisions

  • Increases the long term capital gains and qualified dividend tax rates from 15% to 20% for those that exceed the $400,000/$450,000 threshold above
  • Those with an income which is below the top of the 15% bracket will enjoy a 0% long term capital gain rate
  • All others will have a 15% rate for both dividends and long term capital gains

Pease Limitation is Back

  • This limitation has been absent for 12 years.
  • It reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions.
  • That threshold is now $300,000 for married couples filing jointly and $250,000 for unmarried taxpayers

Personal Exemption Phaseout is Also Back

  • According to CCH, “reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions.”
  • That threshold is $300,000 for married couples filing jointly and $250,000 for unmarried taxpayers

2013 Update to Miscellaneous Income Tax Deductions

  • Child credit is set at $1,000 (it was supposed to revert to $500)
  • Provides a permanent suspension of the 60 month deductibility of education loan interest
  • One year extension of not including the cancellation of mortgage debt as income
  • Two year extension of qualified distribution to charity of required minimum distributions

2013 Federal Estate and Gift Tax Changes

  • The Federal Estate Tax exclusion amount is set at an inflation adjusted $5,000,000.  The amount was set to sunset to a $1,000,000 if nothing was done
  • The Federal Estate Tax rate increased from 35% to 40%
  • Portability was extended
  • Gift taxes were kept unified with Estate taxes so that you can gift up to $5,000,000 (inflation adjusted) before getting hit with a gift tax which is set at that same 40% rate.
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Estate Planning

IRS Increases Annual Gifting Exclusion for 2013

by Evan

The Internal Revenue Service recently published various inflation based adjustments.  Among the two dozen tax provisions affected was the Annual Gift Exclusion amount.  The amount you can gift to someone has increased from $13,000 in 2012 to $14,000 in 2014.

What is the Annual Gift Exclusion Amount?

In the United States a person with interests/assets over $14,000 can not just gift their entire interests to another person without running into Federal Gift Taxes and his or her ultimate Estate Taxes as well (As you will see below it doesn’t mean you’ll actually owe anything).  To prevent this post from being 5,000 words we are going to just focus on yearly gifts between citizens which are controlled by your Annual Gift Exclusion.  The annual exclusion amount is the amount of a present interest that one Donor may gift to another Donee, who is not his or her spouse.

The IRS has a great primer on the Estate and Gift Tax in Publication 950, which expands on what is an “interest”

The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), the use of property, or the right to receive income from property without expecting to receive something of at least equal value in return. If you sell something for less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift

Not All Gifts are Taxable

Publication 950 provides a pretty succinct explanation of what gifts fall outside of a “taxable gift”

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

    1. Gifts that are not more than the annual exclusion for the calendar year.
    2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
    3. Gifts to your spouse.
    4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

The reason that gifts to your spouse are not taxable is that there is an unlimited marital deduction for gifts between spouses.  Interestingly, it wasn’t until 1981 that an unlimited marital deduction was implemented.

What Happens If I Gift More than My Annual Exclusion?

First you have to determine if the gift is eligible for split gifting:

If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must agree to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

Currently, gift splitting allows married couples to give up to $26,000 [Evan’s note – this number is now $28,000] to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion

Second, if you have gifted more than that amount the donor starts to eat into his Unified Credit Amount which, for all intents and purposes, is the amount that one is allowed to pass at death.  Currently, in 2012 that amount is $5,120,000 but is set to reset unless something is done in the next 33 days or so to $1,000,000.  If you have used your entire unified credit amount then it will be taxed to the donor at 35% in 2012 and 55% in 2013.

Most people do not encounter gifting issues but they are good to know they at least exist.

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Estate Planning

What is a Grantor Retained Annuity Trust and What Does it Have to do With Facebook?

by Evan

I am a little late to the story, but I was shocked to learn that a few of the Facebook founders used an estate planning technique known as a Grantor Retained Annuity Trust (GRAT) to help their future heirs save on estate taxes.

It is very long term planning considering those mentioned in the article were all relatively (or even objectively) young to take on such an estate planning technique.  I thought this move deserved more hype then the stock going public, but then again I am in the estate planning world lol.  The estate planning attorney or financial professional that got their ear should be applauded.

According to Forbes,

Zuckerberg and Moskovitz, by FORBES conservative estimate, will together shift $185 million to trust beneficiaries without having to pay gift tax. Sheryl Sandberg, Facebook’s CEO, who was then 39, used the same strategy to transfer at least $19 million tax-free.

As of today, Facebook is down about 32% from when it opened, but that means nothing as this technique was a decades long move.

Part of what makes this story interesting is how it came to public light.  For the most part, estate planning techniques can be kept quiet, however, since these moves were made prior to the IPO of Facebook they all came to light when paperwork to go public was filed with the SEC.

What is a Grantor Retained Annuity Trust (GRAT)?

I don’t think the Forbes Article explains the technique all that well. So is how I explain the technique when I have to:

  • Grantor creates a Trust that is defective for income tax purposes (i.e. it is a completed gift for estate/gift taxes but for income taxes the trust and the grantor are often one in the same)
  • Grantor Retains (The “R”) an Annuity (“A”) – remember the definition of an annuity is just an equal stream of payments.
  • The Annuity is calculated using the government’s Section 7520 rate (assumed growth) and length chosen by Grantor

So in the end the Grantor “gets back” the value of the gift plus growth.  Contrary to popular belief you can’t just gift what you want – there are gifting laws in the United States.  The GRAT allows you to determine how much you “want” to pay in Gift Taxes by playing with the various levers in the calculation.

For example if you take back just a small portion of the value initially gifted then the gift taxes owed will be higher, concurrently/alternatively, if you use a longer term the value of the gift for gift taxes purposes will be smaller because the beneficiary will not receive their interest for a longer time.

Most people who set up a GRAT actually pay no Gift Taxes because they take the value of your initial asset plus the growth mandated by the government.  This subset of the GRAT is often referred to as a “Zeroed Out Grat.” If you are taking the entire asset back plus growth why is this technique popular? Why is Forbes guessing that Zuckerbag, et. al., used this technique?

Why Would the Founders of Facebook Use a GRAT?

In one word, Growth.  When they gifted the shares to their own GRAT they were valued at $X, when the shares went public, they were worth $X + Y, but the calculations were still based on the $X Value.

Only time will tell if this was a good use of time.  If the stock plummets then they wasted time and energy but no real money since they will receive their shares back (or other assets if the trust holds other assets).  However, it is likely that they already saved hundreds of millions if you are going with Forbes’ estimates, and if Facebook grows over the next decade or so then they will save even more.

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