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Using Annuities And The Gift Exclusion

Change is the only constant we can rely on. So expect 2013 to be full of changes, as the Bush tax cuts sunset and a whole new raft of uncertainty creeps in to retirement financial planning.

But a recent WSJ article indicates the annual gift exclusion is not likely to go away.  As more and more families face the prospect of being subject to estate taxes, expect this gift exclusion to get more use.

One interesting way to use gift exclusions is to purchase long term deferred Secondary Market Annuities in the name of a child or grandchild.   A set of grandparents can each gift $13,000 in a year.  Two can conceivably gift $52,000 over the turn of a year to a youngster, purchase a Secondary Market Annuity, and set that child up for future income or lump sum without risk or management worry.

As you well know, our  Annuities come from the strongest carriers in the insurance industry, like New York Life, Met Life, Aviva, Prudential, and other strong carriers.  As fixed and definite investments, they are a great way make a gift that has no exposure to market fluctuations, and further, pays off on a predetermined schedule.  There’s no trustee, trust, or worry that the recipient can squander the principal, or fear of a bad manager making poor investment decisions.

The article appeared here and I’ll quote it below:

Given the uncertainty surrounding next year’s taxes, here is a reassuring thought: One of Uncle Sam’s most useful tax benefits isn’t expiring, shrinking or otherwise under threat after 2012.

Experts call it the “annual gift exclusion.” It allows each taxpayer give anyone else up to $13,000 of assets per year, tax-free. There’s no limit on the number of gifts if they are made to different people, and recipients don’t have to be relatives.

An inflation adjustment will probably raise the amount to $14,000 next year, says Jim Young, an accounting professor at Northern Illinois University.

This break can pack a big punch. Richard Durso, a planner in Philadelphia, has an elderly client who made 13 gifts of $13,000 each last December and again in January, moving nearly $340,000 beyond the reach of taxes at death.

“Given the uncertainty about next year’s estate taxes, using this exclusion is often a good idea,” says Beth Kaufman, an estate-tax attorney at Caplin & Drysdale in Washington.

The exclusion is in addition to the $5.12 million-per-individual lifetime gift-tax exemption, which is scheduled to drop to $1 million next year, unless Congress acts.

There is a very good reason to make $13,000 gifts, even if you don’t have an estate larger than $5.12 million (or $10.24 million per couple): the bite of state taxes at death. According to tax publisher CCH/WoltersKluwer, 18 states and the District of Columbia have tax exemptions below the federal amount; about a dozen exempt $1 million or less.

By contrast, no state except Connecticut imposes a gift tax, according to CCH, and it allows the $13,000 exclusion.

This break has other benefits. It often involves minimal paperwork, and there is a huge advantage to combining them with 529 education savings accounts. Here are the details.

How it works. The annual $13,000 exclusion is per taxpayer, per recipient. However, married couples are allowed to “gift-split,” in which one partner makes gifts for both.

Say a couple wants to make gifts to each of three children and spouses, plus six grandchildren. The total allowable annual gift is $312,000 (12 x 2 x $13,000). The husband’s assets are tied up in a business, whereas the wife has cash, so she makes 12 gifts of $26,000.

According to Ms. Kaufman, givers needn’t file a Form 709 gift-tax return unless the asset is hard to value or the couple needs to use gift-splitting.

Note that this break is separate from one allowing unlimited tax-free gifts for tuition or medical care if the giver pays the provider directly.

Allowed assets. Givers can transfer any asset, including cash, traded or nontraded securities, collectibles or even a partial interest in a business. Hard-to-value assets will need an appraisal, however.

Note that the giver’s “cost basis” becomes the recipient’s. So if a grandfather gives his grandson $13,000 of stock that was bought for $1,000, then the grandson’s taxable profit upon selling the shares will be the appreciation above $1,000.

Caveats. Gifts must be “completed.” Did an aunt “give” her niece a fine rug or heirloom silver before she died? The Internal Revenue Service won’t think so if it finds out the aunt used these possessions until death.

It may be a smart tax move for a legal representative to make gifts shortly before the death of their owner. If so, experts recommend using wire transfers or certified checks to remove funds from accounts before death, which should withstand an IRS challenge.

Technically, the annual exclusion is supposed to cover casual gifts like Christmas presents, so scrupulous givers should take them into account.

The 529 gambit. Many would-be givers worry they will need the money. Gifts made to 529 education savings accounts for the benefit of others, often grandchildren, offer a rare win-win tax situation, as long as the giver owns the account.

That’s because gifts made to these plans are out of the giver’s estate, yet he or she can withdraw the amount of the original gift with no tax consequences if it is needed. (Earnings can also be withdrawn, but that incurs taxes plus a 10% penalty.)

Givers also can elect to make five years of annual gifts at once to a 529 account, as President Barack Obama and his wife did a few years ago.

Other strategies. Some planners recommend using $13,000 gifts to forgive the interest or principal on loans to family members, or to help with a home down payment.

Ryan Thomas, a planner in Indianapolis, suggests that clients tie gifts to retirement-account contributions made by the recipient. That way, he says, “there aren’t awkward questions about how the gift will be used.”

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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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