June 27, 2016

Efficient Ways to Transfer Assets to Friends and Family

Gifting without Loss: More Efficient Ways to Transfer Assets to Friends and Family

Many clients are rightfully wary of tax-related limitations when transferring money or other assets to friends and family members. For the tax year 2016, taxpayers are allowed to gift up to $14,000 annually per recipient without incurring gift or estate taxes. Taxpayers are also allowed to gift either during their lifetime or at death up to $5.45 million without incurring gift or estate taxes. Gifts or bequests in excess of these amounts could result in gift and/or estate taxes as high as 40% of the gift in question.

Listed below are some tax efficient ways in which you can transfer cash or other assets to friends and family members.

Direct Payment of Medical and Educational Expenses

Payments on behalf of friends or family members for medical or educational expenses continue to remain an effective way to transfer dollars to loved ones. A payment made directly to a provider for medical expenses or tuition is not generally considered a taxable gift. Unlike annual exclusion gifts, there is no limit on the amount of this type of gift, so long as the payments are (1) made directly to the provider of the service and (2) made to cover a bona fide medical or tuition expense.

Loans to Friends or Family Members

If you would like to maximize your tax free gifting, you may want to consider making a loan. A loan can be a great way to transfer property to beneficiaries without paying gift tax, especially given the current historically low interest rate environment.  In order to avoid gift or estate tax issues, the interest rate charged on these loans must be equal or greater to the Applicable Federal Rate (AFR). The current AFR’s for June 2016 are 0.64% (short term loan of 3 years or less), 1.41% (midterm loan of more than 3 years and  9 years or less), and 2.24% (long term loan of more than 9 years). The Internal Revenue Service issues new AFR’s each month, which can be found on the IRS website as follows:  https://apps.irs.gov/app/picklist/list/federalRates.html. The annual interest incurred on these loans is generally includible on your income tax returns whether paid or not.

Interest-free loans can be extended to friends or family if the principal amount of all loans to the recipient are less than $10,000. Also, if the borrower’s total investment income for the year is less than $1,000, you may make an interest-free loan of up to $100,000.

Mortgage Loans to Friends or Family Members

Another way to financially support loved ones without fear of tax is offering them mortgage loans  for the purchase or improvement of  property.  There are a few requirements that need to be met in order to ensure that the loan is recognized by the IRS as a mortgage loan and, thus, deductible by the borrower.  First, a “market” value interest rate must be assessed on the loan equal to at least the AFR.  The second requirement is that an official loan agreement must be completed.  The third requirement is that the loan is secured by the home. Mortgage loans are favorable to taxpayers because the lenders can assess a lower interest rate relative to that of the traditional market interest rate. In addition, borrowers are still able to claim the mortgage interest deduction.

Don’t be afraid of giving to your friends and family members, especially when we can provide you with efficient solutions to complex transfer considerations. We are happy to advise you on gifting so that you can give the most while losing the least. Please contact our office for more ways to efficiently transfer assets to those who are closest to you.