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  • Writer's pictureJonathan Udoka

Gift Planning: How to Best Structure Gifts of Land, Cars, or Insurance (Part 2)

Gifts made during your lifetime will reduce the size of your taxable estate, depending on your state’s taxes and death duties, after you’ve passed on. But by reducing the size of your estate, there may be savings in probate-related expenses and federal estate taxes.

Trust Issues

Another option is to put the home/land in an irrevocable trust; your beneficiary how has a financial interest in maintaining the home/land, and you can deduct any costs you incur that are associated with said maintenance. Then there is the QPRT, or the “qualified personal residence trust,” which is somewhat more acceptable to the IRS, but there are risks involved. A QPRT works this way: Let’s say you want to give your $1 million amenities-stuffed, luxury home to your son or daughter or all of your children. A QPRT would require you to put the home into an irrevocable trust for specified number of years, while you continue to live in it. Via an intricate formula, compliments of the IRS, which is based on the current interest rates, the length of the trust, and your age, your right to live in the house turns out to be valued at $600,000.00.

This means that the value of the house as far as your taxable estate is concerned, is now only $400,000, and that’s how much the value will remain, no matter how much the property appreciates afterward. After the irrevocable trust expires, if you choose to continue living in the home, you can pay rent, which would further reduce the size of your taxable estate.

So where’s the risk? If you don’t get along with, or have conflict with your child/children, you might find yourself homeless. Oh no, you and your kids get along just fine. What else could go wrong? You have to outlive the term of the trust. If you die before it expires, the full value of the house is included in your taxable estate and your heirs receive no estate tax benefit.

Cars as Gifts

When you decide to gift a vehicle, you sign ownership over, via the vehicle’s title. In most states, the car's recipient must fill out the majority of the paperwork, including the tax paperwork. In Oklahoma, cars changing ownership between “qualifying” family members (which are parents, children, and spouses) with no money changing hands (no purchase price) are exempt from sales tax. A Family Affadavit (For 794) will be required to complete the transfer.

Gifts of Insurance

Yes, you can transfer a life insurance policy to a beneficiary. But it’s not always a simple thing. The transaction is considered a gift by the IRS, and if you transfer a policy with a value of more than $14,000, gift taxes will be assessed. The good news here, if there really is any, is that the gift taxes won’t have to be paid until you die. Be aware that the amount of gift taxes will be less than the amount of any applicable estate taxes that would be due if your policy remained in your name and as a part of your estate. Why? Because the amount the insurance company pays at death is always much more than the value of the policy while you, the insured, is alive. Here’s an example of how this works: You transfer ownership of a universal life insurance policy to your daughter. At the time of transfer, the value of the policy is $26,000. According to IRS gift-tax rules, $12,000 of this is subject to taxation. You pass away five years later, and the insurance policy pays $500,000. None of this $500,000 is included in your federal taxable estate, and neither are the proceeds because they’re not considered as income by the IRS. One thing to remember: Once you’ve transferred ownership of the policy, you cannot continue to (directly) make the payments on it. The IRS could rightly view that as a form of continued ownership, and so the proceeds could end up included in your federally taxable estate. If the new policy owner cannot afford the premium payments, you can give the money to that person, who must then make the payments.

More Trust Issues

There is another way to transfer a life insurance policy, and that is to create an irrevocable life insurance trust, and then hold the policy in trust. Once you transfer ownership of life insurance to the trust, you're no longer the owner, and the proceeds won't be part of your estate. Why create a life insurance trust, rather than simply transfer a life insurance policy to someone else? Maybe you don’t trust your spouse, or child, to pay the premiums. Or maybe it’s because you may want to get the proceeds out of your taxable estate, but you want to exert legal control over the policy, and you want to eliminate the risks of having a policy on your life owned by someone else. It could instead be possible that you want to prevent the new owner of your policy from cashing it in. There are very strict requirements in this scenario. Number one: the life trust must be irrevocable. If you have the right to revoke it, you will still be considered the owner of the policy, and the proceeds will be subject to estate taxes. Number two: you cannot be the trustee. Number three: you have to create the trust a minimum of three years before your death, otherwise the trust is disregarded, and the policy proceeds are included in your taxable estate.

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