23 March 2018
Besides the feel-good factor that it provides, end of year gifting is also advantageous from an estate planning perspective since it can move assets out of one estate into one taxed at lower rates and/or channel assets to the next generation.
In 2012, due to uncertainty over the federal, estate, gift and generation skipping transfer tax credit shelter amounts and applicable taxing rates, many individuals made significant contributions out of their taxable estate to take advantage of the $5,120,000 federal exemption amount before a possible decrease to $1,000,000.
In January of this year, however, Congress authorised a ‘permanent’ exemption amount (less any previous taxable gifts made). In 2013, that amount as indexed is $5.25m. In 2014, the amount is scheduled to be $5.34m. Married couples may currently pass $10.5m if both spouses are US citizens or domiciled in the US. Additionally, the annual exclusion for gifts increased to $14,000 in 2013 (and will remain at that amount in 2014). Married couples can also transfer $28,000 per individual if the couple elects gift-splitting. Same sex couples can now benefit in the same way as heterosexual couples so long as the couple are in a recognised ‘marriage’: Civil unions or civil partnerships are not recognised as marriages.The annual exclusion amount for gifts from US citizen spouses to non-citizen spouses is $143,000 (due to rise to $145,000 in 2014).
The taxing rate for any amounts in excess of the exemption is currently 40%; a 5% increase from 2012’s 35% taxing rate. Even those who made significant lifetime gifts in 2012 can take advantage of an additional $130,000 exemption amount this year and a further additional $90,000 next year.
Opportunities for US citizens living in the UK
If you live in the UK, you need to factor in the UK tax rules. For example, while a trust will save US federal transfer taxes, it could trigger a large UK inheritance tax charge if created by someone domiciled, or deemed domiciled, in the UK. To circumvent this mismatch, we have assembled our top tips and opportunities for US citizens living in the UK:
*1. Family Limited Partnerships
*For those who want the succession benefits of a trust but who would otherwise suffer a UK inheritance tax charge on the creation of a trust.
*2. Outright gifts
*For those not concerned with continuing control of the assets or for whom long-term asset preservation is not a consideration.
3. Cancelling loans / other receivables from family members.
For those who want to reduce the value of their estate without materially impacting their real asset position.
*4. Excluded property trusts
*Individuals about to become ‘deemed’ domiciled in the UK should consider creating an excluded purpose trust. Such trusts can be used successfully to shelter assets from US estate tax and UK inheritance tax and can provide an appropriate asset preservation vehicle.
If you came to the UK in the 1998/1999 tax year you will become deemed domiciled on 6 April 2014. There are only 67 working days from 1 January to 5 April 2014. Leaving this to the last minute could result in a gift of over $2m to the UK revenue; so you should start your planning now.
*5. Expatriation planning
*An ‘exit’ tax is applied when a ‘covered expatriate’ gives up US citizenship or relinquishes his green card. But, a person with assets valued under $2m generally is not considered a covered expatriate. If you are considering expatriating from the US and have assets of $2m or more, you might consider making gifts to reduce the value of your assets below this threshold.
*6. Transfer all or part of matrimonial home to co-owning spouse
*Where a London home (which has appreciated in value since acquisition) is co-owned, for example, by a US husband and a UK wife, the husband could consider gifting all or part of his interest in the UK house to his wife to avoid US income tax on the gain that would otherwise be taxable on a future sale of the property. Annual gifts from a US spouse to a non-US citizen spouse are only exempt from US gift tax within the low limits set out above. This planning avoids future income tax by utilising all or a portion of the lifetime gift tax exemption.
7. Structuring the future ownership of a non US home
*If a London property is to be purchased with funds provided mainly by the US spouse, he could consider gifting funds to his non-US citizen spouse to enable her to purchase the property or they might consider an ‘inter-spousal’ loan.
This planning avoids future US income tax on the sale of the property either by utilising the lifetime gift tax exemption or by making an inter-spousal loan which can be interest free.
Gifting early can result in many benefits. The Withers US team would be happy to discuss these planning opportunities in more detail.