Q: I have heard you speak on gifting and have also read articles that you have written on the subject. Why don't you share this information with your Coloradoan readers? I am disappointed that you have not written more about estate planning subjects.
A: Thank you for voicing your concern. I am only given a column of space every other week, so I need to touch on a variety of subjects. I am told I should write more about water law, the legal and constitutional aspects of current events, estate planning and taxes, legal aspects of day-to-day life, etc. But the bottom line is that this column is driven by the questions and issues raised by the readers. So here goes my response to your question on gifting.
Any transfer for less than full value results in a tax on the difference in the total value possessed by the transferor before the transfer minus the value remaining after the transfer.
A transfer made during life is called a gift. A transfer made because of death is an inheritance or estate bequest or devise.
For transfers after death, there are three major exceptions: (1) any amount goes tax-free to a tax-qualified charity; (2) any amount goes tax-free to a surviving spouse; and (3) a total transfer of $700,000 goes tax-free to anyone else, whether to one person or to several people, including kids.
The $700,000 figure will rise to $1,000,000 by 2005. It makes no difference who the transferees are (at least for federal and Colorado purposes) or how many recipients.
Anything above $700,000 will initially have a tax of about 44% (44¢ on each $1) – about 38% for federal and about 6% for Colorado.
For transfers during life, any amount can be given tax-free to a spouse (just as for inheritance) and also to tax-qualified charities, although unlike death transfers there are restrictions and limits that might apply, especially for current tax deductions.
For all other gifts, one person can give a bit over $10,000 of value to each person (no limit as to the number of recipients) during each calendar year (no limit to the number of years). But all transfers must be taken into account during that calendar year to see if the total exceeds $10,000 per person.
Also the $700,000 exemption for 2001 can be used during a person's lifetime and is not restricted to death only. But once used for gifting, the amount can not be used to shelter estate taxes.
For example, if someone has a taxable net worth of $810,000, it is possible to transfer $710,000 of value tax free to one person in one year. But now $100,000 is exposed to estate taxes. The following year another $10,000 of value can be gifted to the same recipient, plus the increase in the exemption in subsequent years (the exemption is scheduled to increase to $850,000 in 2003, thus in this case producing an additional available $150,000 exemption in that year).
And for those readers still with me, you probably already have anticipated my next point – the tax rate for estate taxes is the same rate for the gift tax. Thus, the "transfer taxes" all tie back into each other.
If I receive positive response showing interest, I'll do a future column on the do's and don'ts of gifting and estate transfer.
Q: My parents would not listen to me. They gave my minor children stock but title the certificates directly in their names.
A: Anyone, including a minor, can own property. But a minor can not enter into binding contracts. Thus, as long as nothing "legal" needs to be done (like selling the shares), then the property just sits there. You, as the parent, do not have the legal right to deal with your child's property.
Normally, gifts to minors should be made under various custodial arrangements or under state statutes often known as "gifts to minors." The gift can also be made using various trusts.
In your case, if it becomes necessary, you might have to go to court and have a conservatorship set up so that someone has the legal authority to deal with the property. Needless to say the cost to do this may be much more than the value of the gift, not to mention the administrative headaches.
Thus, gently suggest that next time your parents coordinate either with their attorney or your attorney to make certain that everything fits together properly.