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By Liza Horvath


Year-End Gifts


Kenneth Peterson, financial professional and fellow Herald columnist provided an excellent year-end planning checklist in his column of November 28. Two points that Peterson raised - the increased tax burden as a result of the Medicare surtax and year-end charitable donations – can significantly impact high net worth individuals and therefore beg for further discussion.


The Medicare surtax can result in higher income taxes paid by irrevocable trusts and, if you want to maximize the income tax benefits of year-end charitable contributions, the gifts must be done correctly.


Beginning on December 30, 2012, a 3.8% surtax will be payable on undistributed net income of irrevocable trusts when the income exceeds $11,950. Trustees of irrevocable trusts must consider whether it is more beneficial – tax wise – to distribute the income to beneficiaries if that is possible according to the terms of the trust or retain the income. In most instances, giving it to the beneficiary will be better because individuals will only have to pay this 3.8% tax when their personal modified adjusted gross income exceeds $125,000 – but, because of the low tax threshold of trusts - $11,950, the trust will be required to pay the tax almost immediately. The tax is new and it is complex so seek the advice of your tax advisor.


Year-end charitable gifts have been long been fodder for discussion and disagreement among tax attorneys and taxing authorities. Making a last minute gift in hopes that it will reduce your income tax payable only to have it rejected by the IRS is awful. Eric Dryburgh, a principal with the law firm of Adler & Colvin, simplifies charitable giving by saying, “A contribution is made at the time delivery of the asset is affected – or when the donor relinquishes control over the asset.” A check mailed to your favorite pet charity on December 25 but that does not clear your bank account until after January 1 is still a gift of 2013. Also, if your contribution is made by credit card before year-end but you do not pay off the charge until sometime in 2014 – it is still a 2013 gift.


For stock gifts – remember that donating appreciated stock to a charity is great – they will not have to realize capital gains on the subsequent sale so the charity gains more. To complete the gift, the stock must have changed names on the corporation’s records or, if you hold your stock in “street name” as most of us do when we use a broker, the consensus is that the gift is complete when the stock is transferred out of your account.


Remember that if you make a gift of property that exceeds $5,000 in value, you must obtain a qualified appraisal. If the gift exceeds $500,000 – you must file a copy of that appraisal with your tax return. Publically traded stock is treated differently - check with your advisor.


Tis the season for year-end planning – consider the new income tax environment, plan accordingly and always keep charities in mind. Charities can use the support and, when it results in a smaller tax bite for you, everyone wins.


Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com










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