First instituted by the Revenue Act of 1924, gift taxes are incurred when there is a voluntary transfer (i.e., gift) of cash or other property from one individual to another that is less than fair market value.
The Internal Revenue Service (IRS) defines fair market value as, “… the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Each individual is allowed to donate up to $13,000 in cash or property per donor annually without facing a tax, a practice commonly referred to as the annual exclusion.
With the 2014 tax session officially closed, consumers are considering ways to use their tax refund. A smart option is to purchase life insurance.
To help look after future generations, many people elect to transfer property and life insurance policies by gift or at death to a person two more generations below himself or herself. Typically, this means grandchildren and great-grandchildren, also referred to as skip-persons. The goal is to have assets pass from grandparent to skip-persons without being taxed in the child’s estate.
Typically, the transferor places assets in trust to children for life, then to grandchildren. Or, the transferor gives property to grandchildren or places it in trust for their benefit.
A life insurance policy can take care of those you leave behind – if they have access to it.