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An Overview of Asset Transfer Strategies

As you grow older, you have most likely accumulated not only wealth, but properties, and other assets that are included in your estate. However, having all your assets in your estate is not always ideal, and there are many reasons to transfer or gift assets, either initiated by a life event, or suggested by an attorney or financial advisor to better arrange your affairs. Some events include getting married or divorced, resulting in current property or bank accounts to be retitled to jointly owned, or to separate the assets. Alternatively, you could be planning for the future and you establish a trust. Current assets would need to be transferred into the name of the new trust for estate planning purposes and reduce estate taxes. You may even anticipate a lawsuit, especially applicable to those in high-risk occupations, such as surgeons and physicians. There are many reasons why asset transfers take place. Having a working knowledge of potential risks and techniques to avoid these risks can help you determine not only when it is appropriate to move assets, but also the tax implications of each transfer, such as gift taxes or kiddie taxes. Let’s take a deeper look into this below.

There are many moving parts to gifting and transferring assets. It is imperative to consider the current gift tax liabilities, potential kiddie tax liabilities, among other factors that are often neglected not on purpose, but due to lack of understanding.

Gift Tax Liability:

If you are thinking about transferring assets to family members to reduce your income or estate taxes, you should be aware of the gift tax liability. In 2018, any gift to an individual that is greater than $15,000 for the year ($30,000 for married couples) applies against the lifetime gift tax exclusion and requires Form 709 to be filed. Not all gifts or transfers are hindered by certain taxes, however. Gifts under $15,000, or gifts made directly to an educational or health care facility are exempt from gift taxes.  Gifts to U.S Citizen spouses are always exempt.

Kiddie Tax Liability:

The practice of transferring assets to children to avoid income tax on investment earnings is less popular now, because for 2018 investment income exceeding $2,100 earned by qualified children is taxed at the parent’s rate. The first $1,050 is tax free, the next $1,050 is taxed at the child’s rate, and the remaining income is taxable to the parents. It is certainly possible to get around the kiddie tax by investing in assets that don’t pay current income-but what is the point of transferring assets to children, especially when funding college is a better option?

Popular Asset Transfer Strategies:

The bottom line is, asset transfers are not as simplistic as it may seem and can cause consequences that could easily be avoided. Though there are many ins and outs to giving assets, there are solutions in place to help you plan efficiently and effectively.

Annual Gifting– Giving assets annually to loved ones up to the gift tax exclusion amount of $15,000 per year per person to remove assets from one’s estate.

Transferring Assets to Parents– Transferring to parents is a popular alternative, especially if you are supporting them financially. Low tax bracket parents would pay taxes on the income being used for their support at a lower rate than your own.

Making Qualified Gifts- Anyone who makes a gift for education or healthcare on behalf of someone else directly to the institution is not subject to gift tax. Let’s say, grandparents who are paying for their grandchild’s education should pay the school directly to take advantage of this benefit. When you make an exempt, non-taxable gift, you don’t go against your lifetime gift of $11.18 million or $15,000 exemption, but you lower your estate value, in turn reducing your overall tax liability.

The Use of Trusts- Though more advanced, this tool is tremendously effective for the transfer of assets. There is no substitute for consulting with a team of professionals for individual advice regarding this tool, as all individuals have different situations and circumstances.

It is important that you know the tools available to help you plan efficiently, as well as the current gifting limits. You are constantly acquiring (and disposing) of assets until your final day, when the final transfer of all your current assets take place on the day of your passing. Though some of these transfers may be minimal and not subject to legalities, some should not be attempted without counsel, as this may cause inadvertent consequences. Gifting and asset transfer is complex, and if not done correctly, can impose unintended repercussions to you, your family, and your heirs.