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Estate planning could include gift-giving

BY: DEBORAH LEAHY

Many people have discovered that gifting assets while they are alive is a valuable estate-planning technique for passing wealth on to their adult children.

One of the most important benefits of making a gift—which can be defined as a voluntary transfer of property to another made without an expectation of anything in return—is that the act could reduce the overall tax burden of your estate.

On the day you die, the government will deem all of your assets to have been sold at “fair market value,” assuming you are not leaving them to your spouse or common-law partner.

As a result, you could have substantial capital gains in that one year, pushing you into a higher tax bracket on your final return, with the gains taxed accordingly.

If the assets are gifted over a number of years, capital gains taxation might still be applicable, but it could occur within a lower tax bracket, meaning you might pay less tax. Keep in mind that gifts of cash do not give rise to any taxes at the time of the gift.

In addition, gifting your assets to your adult children can help minimize the size of your estate. This could potentially lower executor and legal fees.

But perhaps the most important advantage of all is that you get the satisfaction of seeing your gift help your children while you are still alive.

To make a gift legally enforceable, there must be evidence of the gift giver’s intention to make a gift, as well as a physical act to demonstrate that intention.

For example, if you would like to give a coin collection to your son, you could make it legally binding by making an oral declaration that it is being given as a gift. You would then physically hand it to him. However, to avoid any legal disputes about intention after you die, it is wisest to create a legal document to accompany the act of gifting, such as a gift deed or declaration.

A gift is presumed to be final, with all rights of ownership transferred to the beneficiary. If you want to retain some form of control over the gift, the creation of a trust is an option you may want to consider. You could ensure that when you die, full ownership rights would pass to your child by way of the trust document.

There is much to consider in transferring wealth to your adult children—and estate planning in general—so make sure you consult with your financial adviser, along with a tax or legal professional, to determine what’s best for you.

Deborah Leahy is a financial adviser with Edward Jones.

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