How Much Can You Gift
How Much Can You Gift
By: Martin Shenkman
Everyone is talking about the importance of making big gifts in 2012, but the critical question for many, is how much can you realistically afford to gift without jeopardizing your own financial security? The question is complex and the right answer might be the wrong answer! Many clients are being completely misadvised in the name of an illusory "conservative" approach.
√ What are all of your personal goals? You cannot make a reasonable decision without laying all the cards on the table. Is assuring maximum resources for what hopefully will be many remaining years of retirement key? What are your ages and health status? What is the potential for a long joint life expectancy? What is really necessary to assure financial resources until the second of you dies (if you are married or have a partner)? So the prerequisites for those that are wealthy enough to plan, but not so wealthy that what remains will assuredly cover all future costs, are financial projections and simulations.
√ Some planners might suggest that you "run the numbers" assuming very low growth rates to be "conservative." But is that really the right answer? Using a consistent low investment return may even understate your performance if there is a market drop in early years of your projections. It might also so understate the anticipated return that it will preclude you from really achieving your gift and other goals. More sophisticated simulation models but better help you gain a level of comfort and identify a more robust gift plan.
√ Whatever projections are done life expectancy has been increasing, future inflation rates are difficult to predict, and possible health issues and the state of government and insurance programs to offset health care costs are a significant uncertainty. And since you've lived through the Great Recession investment risk must be a worry. But using worst case scenario projections won't protect you any better than going on a diet and use "very low" calorie estimates for the food you eat. It would be a fun diet but not very productive.
√ Some planners suggest running illustrations out to an old age like 100 years old, others suggest that if there is longevity in your family, run it out to 120. One well known planner suggests: "...run to some age that you think is well beyond the point you will actually live to, and show a high inflation rate and a low rate of return." That may eliminate the ability to make gifts when you can and should. Importantly it ignores the tremendous flexibility trust drafting can provide. You might gift a gift to a self settled trust of which you, your spouse and all descendants are beneficiaries. So if you can receive distributions if needed. Your spouse or partner might fund another trust that names you and descendants as beneficiaries. One of the assets you might gift to the trust might be a closely held business from which you will continue to draw a salary.
√ Excessively conservative financial projections will be damaging to making gifts. Perhaps a more sophisticated approach can achieve more objectives: facilitate maximizing gifts, deflecting any fraudulent conveyance claims by creditors (e.g., you gave away too much as to render yourself insolvent), rebutting an IRS challenge that you had to have an understanding with the donee's to give you money back since you did not retain sufficient assets, all while assuring your financial security. What approach may achieve all these goals? Perhaps use a budget and investment projection and model a result that gives you an 80% probability of achieving your financial goals. Then gift sufficient funds into a self settled trust (domestic asset protection trust or DAPT) to assure a much higher probability of achieving your financial goals. The excess over that can be given to a dynastic trust that you are not a beneficiary of. Making unreasonably "conservative" financial projections ignoring the nature of the done trusts that can be used in your plan is actually not conservative but dangerous to your taking the optimal planning steps for you.
√ The core of the above decision must be a budget and financial plan that assures that both of you, the resources you need for your future, from whatever sources. Intelligent financial planning must lead the estate plan. You cannot gift completely away in any format assets that the financial plan determines are essential for your financial needs. You can gift away assets to your children or trusts for them that the financial plan demonstrates you will never need. Some amount of wealth, perhaps unlikely to be needed by you, but which might be needed by you, should be structured in a manner that permits you access to it "just in case" you should need it.
Martin Shenkman, Jonathan Blattmachr, and Robert S. Keebler just published a 200 page book entitled, "2012 Estate Planning: Tax Planning Steps to Take Now." It is now available as an ebook on www.amazon.com for $39.95 and is written for both the sophisticated client and professional adviser.