By: Martin M. Shenkman, CPA, MBA, PFS, JD
Introduction
Gift planning is a potentially significant planning opportunity for many clients. Tax advantages can be substantial. The current economic difficulties can have substantial varying impact on gift planning for different clients, and for different heirs of the same client. The specter of tough tax legislation for the wealthy on the horizon also are another reason to re-examine gift planning. Note that the annual exclusion increases from $12,000 to $13,000 in 2009.
Gift equalization is more of an issue
The impact of recession makes it important for clients to revisit a key and emotionally difficult gift issue. Your daughter and her family are having a hard time financially and her husband recently had his job reduced to a part time position. She might simply need more help than your son and his family. That's fine. Perhaps you ramp up annual gifts (e.g., include her husband which you hadn't done before). But what about your other children? Do you want equality of gifts? Or, do you feel that helping a child in greater need doesn't have to be equalized? It's a philosophical question worthy of some thought. Whatever you feel, what will the reaction of the children be? You might unintentionally undermine their relationships with each other with substantially unequal gifts? If you decide to equalize how will you achieve this and with what tax results? You might opt to make an equalizing bequest under your will but how will the amount to be paid be determined? You could simply state in your will that a bequest should be made to equalize lifetime gifts made by child family line. The problem with this approach is how do you prove what gifts were actually made? You could state that only gifts reported on a gift tax return will be considered in the calculation. But annual exclusion gifts, which can create tremendous inequality if a child's family lines differ significantly by size, can be significant. Another approach is to use a formula that assumes you made the maximum annual gifts in each year from the date specified in your will until the date of death.
Caution: If you equalize lifetime gifts under your will, be sure to address the allocation of any state and federal tax costs. Your daughter will have received the lifetime gifts without any tax consequences, but depending on how your will is written, your other children's equalizing bequests could be reduced by estate taxes, making them less than equal.
Loan versus gift, which is better
The risk of divorce or financial problems of the heir who is the donee/borrower might both be exacerbated by the economic turmoil. A loan is likely to be better for these reasons. A loan has to be repaid. So, unlike a gift of cash which is likely to be commingled with marital assets, it might be protected from a divorce. A loan can also solve the equalization issue. Unlike a larger gift to a child, the funds have to be repaid. You might not be concerned about equalizing the children who did not need the extra help. But you might be concerned that the better off child, particular if he is serving as executor, might demand repayment of the loan for the financially struggling child. An option to address this concern is to incorporate an estate planning technique called a self cancelling installment note (SCIN). The note ends on your death so no balance is due from the child/borrower. This benefit to your child/borrower is paid for through a higher interest rate or an increase in the principal to be repaid. Finally, when making a loan consider religious issues when charging interest.
Medical/Tuition Gifts in Addition to Annual Exclusion Gifts
While practitioners are well familiar with the right of every taxpayer to pay medical and tuition expenses directly in addition to annual gifts, many clients are not aware of this. The impact of the recession is an important reason to confirm that clients understand this opportunity. If family members are struggling with job loss and other financial problems, you can help out by covering any amount of tuition and medical costs, without any gift tax, so long as qualifying payments are made directly to qualifying educational institutions or direct to medical providers. Evaluate whether these types of gifts should equalized and if so, how.
UGMA/UTMA
Many benefactors make gifts to minor children, grandchildren, nieces, nephews or other donees by simply writing out a $12,000 check to a custodial account. Caution: If your client makes a gift to a Uniform Gift to Minors' Act or Uniform Transfers to Minors' Act account for a child or grandchild, if your client remains the custodian the assets will all be taxed in your estate on death. Avoid this trap by naming another custodian.
529 Plans
Unlike UGMA/UTMA accounts, your client can remain the "account owner" for a 529 plan to which he or she make gifts and the assets in the plan will not be included in his or her estate. As the account owner, your client can pull the assets back should you need them. This ability will make 529 plans the optimal gift vehicle for many people. If you are caught between the Scylla and Charybdis of not having enough assets because of the market meltdown and worrying how much more costly the estate tax might become in the next administration, have your client hedge his or her bets with 529 plan gifts.
Step-Up What?
A drawback of giving away assets is that your client's heirs won't benefit from the step up in tax basis at death. If your client paid $10 for a stock and its worth $280/share now, if they hold it until death the tax basis becomes $280 and the $270 capital gain disappears. Does anyone still own stocks like that? Most folks have no shortage of assets that have little or no appreciation so that the step-up issue might only be wishful thinking. Gifting losers is not a winner either. So guide yoru clients to cherry pick the right assets for gifts.
Evaluate Larger Gifts to Grandchildren
If tough economic times motivates your client to want to help grandchildren more than mere annual gifts and current tuition, there are some clever techniques that can help accomplish that goal. Counsel your clients to make advance payments of non-refundable tuition for all grandchildren and great grandchildren for all future years. If they're all in private schools, the amount your client can transfer is substantial. There are a few requirements: 1) Your client must pay the tuition directly to the school; 2) The school must be a qualified educational institutions as defined in IRC 170(b)(1)(A)(ii); 3) You must have an agreement with the school that the tuition payments cannot be refunded. PLR 200602002. Caution: Remember private letter rulings such as this cannot be relied upon by other taxpayers, but might be viewed as an indication of what is acceptable to the IRS.
Consider Substantial Gifts Now
Counsel clients in appropriate situations to consider making the maximum gifts they can make, including using up a significant portion of their $1 million lifetime exemption. If assets values are at a nadir now is the time to gift away family business and real estate interests, the family vacation home and more. Whether a simple direct gift (e.g., shares in the family widget company) or a more complex gift (GRATs, IDITs and other acronyms) now may just be the time to gift big and get future appreciation out of your estate. Example: The business had been worth $6 million about two years ago. Declining sales and increased raw material costs have reduced the appraised value of the business. The family business was just appraised at $4 million. The appraiser determined that this value should be discounted by 40% to reflect the lack of marketability and control a 10% of lesser shareholder would have. So the percentage of stock your client can gift to every child, grandchild and spouse of a child or grandchild might be significant. $12,000/[$4 million x (1-40%) = $2.4 million]. With four married children, each of whom has three children, you and your spouse can gift [$12,000 x (4+4+(3x4)) = 20] = $240,000, for a total for a couple of $480,000, which equates to 20% of the business ($480,000/$2,400,000). If you make similar gifts in January you'll have given away 40% of the business.
Caution Clients to Consider Overall Gift Limits
A client's variable insurance policy got nailed in the stock market meltdown, or their net worth has declined and they're purchasing additional life insurance to protect your family, you will have to make larger gifts this year to your insurance trusts (if your insurance is not owned by a trust you have other fish to fry). All gifts count towards the $12,000 annual exclusion gifts. Monitor your overall gifts. If your client's son is a beneficiary of the client's insurance trust, your client won't be able to make full annual gifts to him. If your client exceeds the annual exclusion gifts they will have to file a gift tax return and will use up some of their lifetime $1 million exemption (or owe gift tax if the client has already used their lifetime exemption).
Conclusion
Assist clients' in evaluating their gift programs in light of recent economic and other changes, your needs as well as the needs of your heirs in the current circumstances. Move quickly, if economic recovery is approaching and if your client's don't take advantage of gifting rules opportunities will be lost.
Introduction
Gift planning is a potentially significant planning opportunity for many clients. Tax advantages can be substantial. The current economic difficulties can have substantial varying impact on gift planning for different clients, and for different heirs of the same client. The specter of tough tax legislation for the wealthy on the horizon also are another reason to re-examine gift planning. Note that the annual exclusion increases from $12,000 to $13,000 in 2009.
Gift equalization is more of an issue
The impact of recession makes it important for clients to revisit a key and emotionally difficult gift issue. Your daughter and her family are having a hard time financially and her husband recently had his job reduced to a part time position. She might simply need more help than your son and his family. That's fine. Perhaps you ramp up annual gifts (e.g., include her husband which you hadn't done before). But what about your other children? Do you want equality of gifts? Or, do you feel that helping a child in greater need doesn't have to be equalized? It's a philosophical question worthy of some thought. Whatever you feel, what will the reaction of the children be? You might unintentionally undermine their relationships with each other with substantially unequal gifts? If you decide to equalize how will you achieve this and with what tax results? You might opt to make an equalizing bequest under your will but how will the amount to be paid be determined? You could simply state in your will that a bequest should be made to equalize lifetime gifts made by child family line. The problem with this approach is how do you prove what gifts were actually made? You could state that only gifts reported on a gift tax return will be considered in the calculation. But annual exclusion gifts, which can create tremendous inequality if a child's family lines differ significantly by size, can be significant. Another approach is to use a formula that assumes you made the maximum annual gifts in each year from the date specified in your will until the date of death.
Caution: If you equalize lifetime gifts under your will, be sure to address the allocation of any state and federal tax costs. Your daughter will have received the lifetime gifts without any tax consequences, but depending on how your will is written, your other children's equalizing bequests could be reduced by estate taxes, making them less than equal.
Loan versus gift, which is better
The risk of divorce or financial problems of the heir who is the donee/borrower might both be exacerbated by the economic turmoil. A loan is likely to be better for these reasons. A loan has to be repaid. So, unlike a gift of cash which is likely to be commingled with marital assets, it might be protected from a divorce. A loan can also solve the equalization issue. Unlike a larger gift to a child, the funds have to be repaid. You might not be concerned about equalizing the children who did not need the extra help. But you might be concerned that the better off child, particular if he is serving as executor, might demand repayment of the loan for the financially struggling child. An option to address this concern is to incorporate an estate planning technique called a self cancelling installment note (SCIN). The note ends on your death so no balance is due from the child/borrower. This benefit to your child/borrower is paid for through a higher interest rate or an increase in the principal to be repaid. Finally, when making a loan consider religious issues when charging interest.
Medical/Tuition Gifts in Addition to Annual Exclusion Gifts
While practitioners are well familiar with the right of every taxpayer to pay medical and tuition expenses directly in addition to annual gifts, many clients are not aware of this. The impact of the recession is an important reason to confirm that clients understand this opportunity. If family members are struggling with job loss and other financial problems, you can help out by covering any amount of tuition and medical costs, without any gift tax, so long as qualifying payments are made directly to qualifying educational institutions or direct to medical providers. Evaluate whether these types of gifts should equalized and if so, how.
UGMA/UTMA
Many benefactors make gifts to minor children, grandchildren, nieces, nephews or other donees by simply writing out a $12,000 check to a custodial account. Caution: If your client makes a gift to a Uniform Gift to Minors' Act or Uniform Transfers to Minors' Act account for a child or grandchild, if your client remains the custodian the assets will all be taxed in your estate on death. Avoid this trap by naming another custodian.
529 Plans
Unlike UGMA/UTMA accounts, your client can remain the "account owner" for a 529 plan to which he or she make gifts and the assets in the plan will not be included in his or her estate. As the account owner, your client can pull the assets back should you need them. This ability will make 529 plans the optimal gift vehicle for many people. If you are caught between the Scylla and Charybdis of not having enough assets because of the market meltdown and worrying how much more costly the estate tax might become in the next administration, have your client hedge his or her bets with 529 plan gifts.
Step-Up What?
A drawback of giving away assets is that your client's heirs won't benefit from the step up in tax basis at death. If your client paid $10 for a stock and its worth $280/share now, if they hold it until death the tax basis becomes $280 and the $270 capital gain disappears. Does anyone still own stocks like that? Most folks have no shortage of assets that have little or no appreciation so that the step-up issue might only be wishful thinking. Gifting losers is not a winner either. So guide yoru clients to cherry pick the right assets for gifts.
Evaluate Larger Gifts to Grandchildren
If tough economic times motivates your client to want to help grandchildren more than mere annual gifts and current tuition, there are some clever techniques that can help accomplish that goal. Counsel your clients to make advance payments of non-refundable tuition for all grandchildren and great grandchildren for all future years. If they're all in private schools, the amount your client can transfer is substantial. There are a few requirements: 1) Your client must pay the tuition directly to the school; 2) The school must be a qualified educational institutions as defined in IRC 170(b)(1)(A)(ii); 3) You must have an agreement with the school that the tuition payments cannot be refunded. PLR 200602002. Caution: Remember private letter rulings such as this cannot be relied upon by other taxpayers, but might be viewed as an indication of what is acceptable to the IRS.
Consider Substantial Gifts Now
Counsel clients in appropriate situations to consider making the maximum gifts they can make, including using up a significant portion of their $1 million lifetime exemption. If assets values are at a nadir now is the time to gift away family business and real estate interests, the family vacation home and more. Whether a simple direct gift (e.g., shares in the family widget company) or a more complex gift (GRATs, IDITs and other acronyms) now may just be the time to gift big and get future appreciation out of your estate. Example: The business had been worth $6 million about two years ago. Declining sales and increased raw material costs have reduced the appraised value of the business. The family business was just appraised at $4 million. The appraiser determined that this value should be discounted by 40% to reflect the lack of marketability and control a 10% of lesser shareholder would have. So the percentage of stock your client can gift to every child, grandchild and spouse of a child or grandchild might be significant. $12,000/[$4 million x (1-40%) = $2.4 million]. With four married children, each of whom has three children, you and your spouse can gift [$12,000 x (4+4+(3x4)) = 20] = $240,000, for a total for a couple of $480,000, which equates to 20% of the business ($480,000/$2,400,000). If you make similar gifts in January you'll have given away 40% of the business.
Caution Clients to Consider Overall Gift Limits
A client's variable insurance policy got nailed in the stock market meltdown, or their net worth has declined and they're purchasing additional life insurance to protect your family, you will have to make larger gifts this year to your insurance trusts (if your insurance is not owned by a trust you have other fish to fry). All gifts count towards the $12,000 annual exclusion gifts. Monitor your overall gifts. If your client's son is a beneficiary of the client's insurance trust, your client won't be able to make full annual gifts to him. If your client exceeds the annual exclusion gifts they will have to file a gift tax return and will use up some of their lifetime $1 million exemption (or owe gift tax if the client has already used their lifetime exemption).
Conclusion
Assist clients' in evaluating their gift programs in light of recent economic and other changes, your needs as well as the needs of your heirs in the current circumstances. Move quickly, if economic recovery is approaching and if your client's don't take advantage of gifting rules opportunities will be lost.
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