Giving away property before death is a way to avoid tax liability, specifically the gift tax and the estate tax. A gift tax will be incurred on any gift valued over £8,450, and this includes both money and property. If you want to transfer property to your children before death, it is important to consult a financial adviser or tax attorney to discuss your options. There are ways around the gift tax.
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Gift the Property Along With Your Spouse
For 2011, IRS rules state that an individual's gifting exemption is £8,450, and can be combined with a spouse. Thus, each couple can give a maximum of £16,900 to their child and avoid the gift tax. If you have two children, you can double that number again. According to estate tax rules for 2011, estates valued at £3 million and above will be subject to the estate tax, but only amounts over that level will be taxed. Work with your financial planner to determine when and how often you need to transfer property to the children to avoid a future estate tax.
Pay for Education and Set Up a Trust Fund
School tuition can be considered a gift, so be sure to pay for your child's college education. You may have planned to do that anyway, and most states do consider college tuition to be part of parental support obligations. More importantly, those with large estates should set up a trust fund for the minor. A large gift in the form of a trust is an essential way to avoid the gift tax and subsequent estate tax. However, to qualify for these tax exemptions the child must receive the trust money at age 21.
Establish a Custodianship
Large amounts of money in the child's name will need to be managed. Consider establishing a custodianship to oversee the child's assets and reduce your income tax. The money is given to the custodian, used for the child's benefit, and must be transferred to the child upon reaching age 21. Each state will allow you to do this under the Uniform Transfers to Minors Act. Know that in addition to cash, property and tuition, stocks can also be gifted to your child, and it would make sense to have an adult managing those assets.
What to Do About the House
Avoiding estate tax liability on your house is a complicated topic, and the options can involve significant risk. It's essential that you speak with a financial planner or tax lawyer on this topic to decide your best course of action. However, if your estate is valued below £3 million it is likely in your best interest to stay in the house. If you give the house to the child as a gift, you will have to use up the gift tax and estate tax exemptions, so talk to a professional about your options.
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