Shirley, yes, if you are giving more than $13,000 to one individual this year, you need to file a gift-tax return. But you don't have to worry about any taxes on it now. Your estate might owe gift tax in the future, but only if you exceed the lifetime exemption.
You can however make gifts of up to $13,000 per person to an unlimited number of individuals in 2012.
To follow up on Rachel, every dollar you give above $13,000 goes toward your lifetime gift tax exclusion. Until last year, the exclusion was $1 million, which was deducted at your death from your estate tax threshold. This year, you can give $5.12 million in gifts above the $13,000. That $5.12 million is the total for allowable gifts and estate.
To clarify, the $5.12 million is good only if you die this year.
We had a similar question in our tax chat last week. Sandra Block suggested that you could gift $13,000 now and $14,000 in 2013, rather than exceeding the limit in 2012. But as Rachel said, your estate will only owe taxes if you exceed the lifetime exemption.
Alright, let's ago ahead and get to our next question from Karl.
It all depends on the kind of trust. A bypass trust would protect both spouses' estate tax exemptions. It is getting late in the year to do some of these things, but you should consult an estate planning lawyer immediately if you think this is something you may want to consider. You can't set up these trusts on your own.
Good advice. Thanks, Susan.
Let's go ahead and take our next question from Tim.
Hi Tim. Since you inherited these shares, your cost basis "steps up" to the fair market value of the stock on the date of your parent's death. This could be a big benefit for you, since you'll only owe capital gains tax on gains that occurred since the "step up," and not on all the gains that occurred since your parent originally bought the stock.
Thanks, Eleanor. Sounds like it might be an even better deal since capital gains taxes are expected to go up next year.
Tim's question also serves as a caveat for people considering making gifts of stock during their lifetime. If you give the shares now, your cost basis transfers over to the recipient -- so the recipients don't get that "step up" in basis that they would receive if they inherited the shares.
Alright, it looks like we have one more question left from Gordon.
Hi Gordon. It can make a lot of sense for grandparents to set up their own 529 accounts for the benefit of grandchildren. That way you can always withdraw the money if you run into unexpected costs such as big medical bills -- though you'll owe tax and a 10% penalty on the earnings. In many cases you'll also get a state tax deduction for contributions to the 529 account.
You can also contribute up to five years' worth of gifts -- $65,000 in 2012 -- to a 529 without any gift-tax consequences.
If you do set up your own 529 account, make sure you tell the parents. You need to make sure that the extra money does not jeopardize any possible financial aid.
Having multiple 529 accounts shouldn't create big complications for the grandkids -- though of course you'll want to coordinate with your son on this, especially if the grandkids will be applying for financial aid.
That's great, Eleanor. Thanks.
Alright, looks like we are out of time for today’s chat.
Thanks so much for joining us and for submitting some great questions.
And a special thanks to Eleanor, Rachel and Susan for helping us out today!
If you have any remaining year-end financial questions, be sure to join us again next Thursday, Dec. 13 for a two-hour chat with planners from the National Association of Personal Financial Advisors.