INVOLUNTARY SOCIAL CAPITAL VS. VOLUNTARY SOCIAL CAPITAL
“Social capital” is essentially money or other assets which will be used for activities which benefit either the government or society. When you pay taxes, you are involuntarily creating social capital, which will be spent as the government decides. With proper estate planning, you can reduce or eliminate wealth transfer taxes such as the estate, gift, and generation skipping transfer taxes. However, to the extent needed or desired, you can also voluntarily create social capital, by making transfers which will be used by non-governmental organizations for activities or programs which benefit society – i.e., charities. By making transfers to charities, you (or your designees) can decide which programs should be funded, and what social benefits you wish to provide. Proper planning can allow you to realize very favorable tax treatment for gifts made during your life and bequests made at your death under your Will, revocable living trust, or beneficiary designations. You can even use a number of charitable giving techniques to provide for your favorite charity or charities without a significant cost to either you or to your desired individual beneficiaries.
LIFETIME GIFTS
A “Lifetime Gift” is an asset transfer which is made during the lifetime of the donor when he or she transfers an asset to a third party recipient (which can be either an individual or a charity). Lifetime gifts can be either exempt from or subject to federal gift taxes (Georgia has no state gift taxes; some states do have state gift taxes, however), depending on the circumstances surrounding the gift and a number of factors. Gifts may be deductible if made to a qualifying spouse or charity, or they may be fully taxable. Under current federal law, each individual U.S. citizen or U.S. permanent resident has a tax credit against gift taxes which allows a maximum amount of assets to be transferred in taxable lifetime gifts. For 2015, this tax credit produces an effective gift tax lifetime unified exemption of $5,250,000, and this amount is subject to indexing for inflation in future years. The gift tax has a top marginal rate of 40%. If taxable gifts are made after the lifetime tax credit against gift taxes has been used up, the maker of the gift (the “donor”) may need to actually write a check to pay the gift taxes generated. In addition, under current federal law, the amount of taxable gifts made during a donor’s lifetime will reduce the amount of assets which the donor can transfer at his or her death without incurring a federal estate tax.
GIFT TAX
The gift tax is one of three federal taxes which may apply any time assets move from one person to another for no consideration. The gift tax is applied to transfers made during the lifetime of the donor. It can apply to outright gifts, gifts made indirectly (which benefit a person but are not given directly to him or her), or gifts made in trust. The federal gift tax is considered to be “unified” with the federal estate tax because taxable gifts made during your lifetime reduce the amount which you can transfer free of estate taxes at your death. The gift tax has some exceptions. For example, gifts valued below the “annual exclusion amount” are not taxable. To qualify for the gift tax annual exclusion, the gift must usually be made either outright or through a properly structured trust under certain conditions, and cannot be in excess of the current annual gift exclusion amount. In addition, tuition payments made directly to a school, and medical expenses paid directly to the provider of health care related services, may not be considered “gifts” at all for purposes of the gift tax. There are also some gifts which are deductible for gift tax purposes, such as charitable gifts made to tax-exempt charities, which can qualify for the charitable deduction, and gifts to your spouse, which may qualify for the marital deduction. Each exclusion, exemption, and deduction has certain rules which must be met, or the gift will not qualify. Gifts which do not qualify for an annual exclusion, an exemption, or a deduction are subject to the gift tax. These taxable gifts first reduce your ability to make taxable transfers during your lifetime or at your death. If taxable gifts made during your lifetime exceed your gift tax exclusion amount, however, gift taxes will actually be due. In addition, making a taxable gift triggers a requirement that the gift maker file a federal gift tax return (IRS Form 709) and report the gift to the IRS, even if no payment of gift taxes will actually be due.