The new taxes on investment income take a substantial bite out of the interest and dividends received by affluent taxpayers with incomes above a certain threshold. The new taxes assessed on the rich to pay for Affordable Car Act (a.k.a Obamacare) have made income-shifting strategies more attractive than ever for both single and joint filers with high incomes. One of the easiest ways for your financial advisory clients to reduce their taxable income is to gift some of their assets to their kids, grandkids, cousins or other relatives. Knowing the rules for how to do this can help your clients to minimize their tax bills and transfer their wealth in the most efficient manner possible.

The Gift Tax Exclusion

One of the most straightforward methods of transferring wealth is to simply give cash, securities or other property directly to friends or relatives each year to take advantage of the gift tax exclusion. The IRS permits filers to give $12,000 to another person each year without reducing the payor’s unified credit. But since this gift doesn’t have to be in cash, it may make more sense to gift that amount of income-producing securities instead, such as dividend-paying stocks or bonds that pay taxable interest. This way, the income that is generated on these instruments from then on is taxed to the recipient instead of the original owner. But tell your clients to watch out for the Kiddie Tax limits on investment income that is paid to their children. Having them move maximum allowable amount into a Roth IRA for each child every year can help to mitigate this issue. (For more, see: Gift Tax Filing Requirements.)

Family Partnerships

Creating a Family Limited Partnership or Family LLC may be a good way for wealthy clients to move money to others indirectly. Cash or assets are gifted into the partnership or LLC and then moved on to other family members. But there are many rules pertaining to how this is done, and your clients will need your advice and guidance in order to do this correctly and avoid an audit. (For more, see: Using an LLC for Estate Planning.)

Hire Your Relatives

Paying your relatives to perform routine tasks can be another way of moving money to those in lower tax brackets. If you pay your kids to clean your office building or perform other mundane duties while they are in school, then they can get not only some spending money but also potentially gain valuable contacts and knowledge of how you run your business. And if you create certain types of LLCs or other business entities and hire them through this channel, then you will not have to withhold Social Security or other payroll taxes for them, at least until they turn 21. Of course, your clients will also need to pay wages that the IRS will consider reasonable, as it will disallow a deduction for payment of $10,000 to a child for mowing the office building lawn twice. (For more, see: Leaving Inheritance to Children Easier Said than Done.)

Bequeath It

If your clients have highly appreciated stock or other securities outside their retirement plans, then their heirs can get a step-up in the cost basis if they inherit them directly. If they intend to leave some assets to charity and others to relatives, they may come out ahead by leaving their traditional IRAs or other retirement plans to the charity, since no step-up in basis can be had from them. (For more, see: Estate Planning Tips for Financial Advisors.)

The Bottom Line

There are many ways that your clients can move money or other assets to relatives in order to reduce their tax bills. Knowing their situations and the rules that pertain to them can help you to maintain a loyal client base by providing valuable advice and guidance that will enable them to be happier with the final numbers they see on their returns next year. (For more, see: Tips for Family Wealth Transfers.)

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