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While a will can take care of distributing your assets to your family after you die, you don’t have to wait until you’re gone to divide up your assets. Maybe you want to help your children financially while you’re still alive, or you want to avoid any confusion or possible squabbles over your estate. You might see dividing your assets before death as a way for your children to avoid estate taxes. Depending on the nature of the assets and your financial goals, you have several choices when it comes to giving things to your children while you are still living.
If you have a lot of cash in accounts at your disposal, as of 2012 you could give up to $13,000 a year to each child, tax free. If you’re married, you and your spouse could each give $13,000, for a total of $26,000 a year per child. You can give the money outright or put it into a trust. Neither you nor your children will pay taxes on these gifts, and you don’t have to report the gift on a separate gift tax return. You can also give property such as furniture, jewelry and other goods worth $13,000 or less under this gift tax rule.
Instead of transferring title to your property and other assets directly to your children, you can establish an irrevocable trust. The trust takes title to your assets, and you specify how the income from the trust will be distributed. You can give your children an “allowance” from the trust each year or turn everything over to them upon your death or once they reach a certain age. Once you set up an irrevocable trust you can’t change the terms of the trust, so you’ll need legal counsel to make sure the trust is set up correctly to carry out your intentions.
Revocable Living Trust
With a revocable living trust, you transfer your assets to a trust, managed by a trustee, but you can cancel the trust if you change your mind. You instruct the trustee how you want your assets managed, which could include gifts to children, both while you’re still alive and after your death. Your will may specify that all your remaining assets go into the trust upon your death. Some states allow you to act as your own trustee, or you may appoint another relative or a third party, such as an attorney or banker.
You can deed property to your children before your death. The 2010 Tax Relief Act increased the exemption from gift tax to $5 million. You’ll need to file a Form 709 -- Gift Tax return if your gift is worth more than $13,000 but less than $5 million, but you won’t owe taxes on the gift. This provision of the law was set to expire Dec. 31, 2012, and it was unknown at publication whether this would be renewed by Congress.
If you give substantial property, such as stocks or real estate, to your children before you die, they assume your basis in the property. For instance, if you bought a house for $15,000, this becomes your children’s basis in the property if you deed the property to them before you die. If they later sell the house for $150,000, they’ll owe capital gains tax on the difference between $15,000 and $150,000. If you wait and let them inherit the property, their basis is the value of the property at the time of your death. Also, once you deed your assets to your children, you lose all control of the assets. They could be seized by a creditor, lost in a divorce, or passed to someone else if your child precedes you in death.
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