IT’S BETTER TO GIVE THAN TO RECEIVE

07/06/2011

IT’S BETTER TO GIVE THAN TO RECEIVE
by Glenn M. Wall, Attorney at Law

 A previous article in this space discussed the most commonly used tactic to reduce a decedent’s taxable estate by the use of “bypass” trusts in a Last Will and Testament.  But another question arises: are there additional means at hand to reduce a taxable estate, ways that do not require a taxpayer to wait until death to minimize estate taxes? 

 A strategy commonly used to reduce the size of a taxable estate is to transfer wealth by lifetime gifts.  Properly structured gifts to the objects of one’s bounty, whether they are loved ones or charities, immediately reduces our taxpayer’s estate value.  Here’s how this tactic works:

 The federal gift tax law requires that a tax be paid on the value of property in excess of $12,000 (as of 2011) gifted during any taxable year.  If your spouse joins in the gift, you can double the exemption amount to $26,000.  Thus, if you have two children, you could gift $52,000 per year every year to reduce your estate from potential estate taxes.  The property used for gifts can be any type--cash, real estate, stocks, bonds, business interests, jewelry--the list is endless.  There are only two basic requirements:  the gift must be of a “present interest” in the property (i.e., it must be a “completed” gift), and a proper valuation of the gift must be made so that it can be disclosed on the taxpayer’s gift tax return for that year.

 The present interest requirement means simply that no “strings” can be attached to the gift.  For example, if the taxpayer makes a gift to his daughter, but attaches conditions to the use of the gift (“You can have this Coca-Cola stock, but if you marry that bum you’re dating, you must return it”), the gift is incomplete because the condition could result in the asset reverting to the taxpayer.  The most common example of an incomplete gift, or a gift that does not covey a present interest, are gifts in trust.  If our taxpayer transfers property to a trustee to be held for the benefit of the daughter, then the daughter has no right to use the property immediately and the gift will not be allowed for gift tax purposes.  (There are some very complicated exceptions to this rule that are better addressed another day.)  This means that the asset purportedly transferred will still be included in the taxpayer’s estate for estate tax purposes, thus defeating the tax rationale for the gift. 

 The valuation requirement is easily met in the case of cash ($13,000 is, after all, $13,000) or marketable securities (Coca Cola’s stock price is listed every day on the New York Stock Exchange).  As for other assets, it may be useful to have a professional appraisal made.  Armed with this valuation proof, properly noted in a gift tax return, the taxpayer will have little problem in proving the gift was properly made for the proper amount in any given tax year.

 But what if this amount represents only a drop in the bucket compared to your total estate?  Is there any way to increase the amount of your gifts without paying any gift tax? 

 Of course there is.  Remember the unified credit, the dollar amount (currently $5,000,000) below which no estate tax is paid?  It earned the name “unified” because it can be credited to gifts as well. Our two-child taxpayer could, therefore, gift $5,000,000 in 2011, plus $52,000 already exempted without paying a dime in gift taxes.  For high net worth individuals, this represents an excellent strategy for not only reducing their taxable estates, but also removing from their estates the potential appreciation in the value of the gifted property over a number of years.

 A word of warning: by applying the entire unified credit to gifts during the taxpayer’s lifetime, the credit would not be available for use at the taxpayer’s death. 

 There is an additional advantage for making gifts to your favorite charity.  While gifts to individuals are only exempt from gift tax up to $13,000 ($26,000 jointly) there is no dollar limit on the amount of the gift you make to charity.

Glenn M. Wall is an attorney in Suwanee, Georgia. He has helped clients with planning estates, drafting wills, and creating powers of attorney since 1985.